The San Francisco Real Estate Market in Summer

August 2011 Update

As the world wrestles with debt crises, the San Francisco economy and home market continue to improve, at least for the time being. (Knock on wood.) According to the Center for Continuing Study of the California Economy, of the 28,800 jobs the state added in June, 12,800 were in just 5 Bay Area counties – many of them well-paying. The city and Bay Area have a number of major high-tech companies growing quickly and/or going public, creating a burst of brand new wealth. Since SF typically sees only 5000 to 7000 home sales per year, these changes can have an outsized impact on its real estate market.

San Francisco’s unemployment rate dropped from 10.1% in February to 8.4% in May; both residential and commercial rents are rising in the city; mortgage interest rates remain near historic lows; and we have a limited inventory of homes for sale when compared to strong buyer demand: all these factors appear to be applying upward pressure on prices. It’s still too soon to draw definitive conclusions about a market turnaround, but the S&P Case-Shiller Index for high-price-tier homes in the Bay Area (houses over $580,000) did show price increases in March, April and May (their latest report). Some pundits believe these increases are merely short-lived seasonal bumps, but considering the strength of our early-summer market — what we’re experiencing on the street and what’s showing up in the statistics — we suspect that is not the case.

Remember that San Francisco (as well as the Bay Area, state and country) is full of micro-climate home markets and these different markets can and do move in different directions or at different speeds.

Median Prices for 2-Bedroom Condos
This is a snapshot of median prices for 2 bedroom condos in a number of SF neighborhoods in selected years since year 2000, ending with year-to-date 2011. One can clearly see the peak period for values in 2007/ 2008, the large decline after September 2008, and the relative price stability in most neighborhoods in the last 18 to 30 months. Median prices often fluctuate up and down 3-5% without great significance. Consistent trends over the longer term are indicative of genuine changes in market values. For our detailed report on the SOMA/ South Beach/ Mission Bay condo market:
SOMA/South Beach Report

Average Dollar per Square Foot
Fluctuations of 1 to 2% are not particularly meaningful for a general statistic like this one – and indeed are more an indication of basic value stability than anything else. As with any general statistic, real market changes will show up consistently over the longer term. Some neighborhoods have been seeing monthly increases in average dollar per square foot figures since March or April, perhaps reflecting value increases in a strengthening market. For our detailed update on Realtor District 5 (the greater Noe/ Castro/ Haight area):
Noe Vly/ Castro/ Haight Market Report

S&P Case-Shiller Home Price Index
The Case-Shiller High Tier Price Index for May (published in late July) for the 5-county San Francisco Metro Statistical Area showed its third consecutive monthly increase. It is the “High Tier Price” Index that most applies to the city of SF itself with its high-priced housing inventory. Its latest price reading is now less than one half of one percent below that of January 2009. Considering the supply and demand dynamic in San Francisco this spring and early summer, it is quite possible, even likely, the Index will show further increases in its June and July reports. For more information about Case-Shiller:
Case-Shiller Index Deciphered

Percentage of Home Listings Accepting Offers
This chart shows how the market began to dramatically strengthen in early 2011. In July 2011, the percentage of listings going under contract was about 22%, a huge change from July of 2010, when the percentage was 15%.

Median House Sales Price
This chart clearly indicates how the regular, non-distress house market – where the median sales price is climbing (to $850,000 in July) – is distinct from the distress house (bank and short sales) market – where the median sales price is declining. Distress house sales are clustered in the city’s less affluent neighborhoods and at the lower price ranges, and are often actually in distressed condition: they generally do not affect values of non-distress houses in most other SF neighborhoods. And the current luxury home market in SF is another world altogether:
SF Luxury Home Market Report

Price Reductions, Time on Market, Sales Price
Most of the SF homes that sell, accept offers relatively quickly at a price very close to asking price. Those homes that go through 1 or more price reductions take much longer to accept offers and sell at a substantial discount to original list price. And a fair proportion of listings are withdrawn from the market without selling, typically due to being perceived as overpriced. Homes that are priced correctly right at the start, prepared carefully to show at their best, and marketed comprehensively typically achieve the highest sales prices in the shortest times.

How Buyers Find Homes
The large majority of buyers now find the home they purchase through their real estate agent or online (or most often, a combination of the two). Open houses and signage come a distant third, and newspapers and real estate magazines only play a tiny role. All of which is a huge change from the way it was only 10 years ago. Since most agents and buyers first evaluate a home from its photos, professional photography of a well-prepared home is critical. Then those photos must be used in effective broker-to-broker and online marketing campaigns — to get buyers and agents inside the property.

Renting vs. Buying
One of the standard ways to evaluate if a home market is valued correctly is to compare what it costs to rent a home versus to buy it. The Economist magazine, one of the earliest to predict the housing bubble, recently stated that based upon current rent vs. buy costs, U.S. homes are now slightly undervalued. In SF, rents have been climbing. This analysis compares the average asking rent for a 2 bedroom SF apartment ($3350 per, to the median price for a 2 BR, 2 BA condo in Noe Valley ($850k). (There is a full report that accompanies these charts.) Calculations vary hugely depending on assumptions regarding down payment, mortgage rate, future inflation & appreciation, closing costs and other financial criteria. Perform your own calculations at:
Rent vs. Buy Calculator

Inventory of Homes for Sale
There were approximately 600 fewer listings for sale in the city during the month of July 2011 as compared to July 2010, yet unit sales were actually a bit higher and the number of listings which accepted offers was up about 20% from last year. Fewer listings but many more listings accepting offers = a much hotter market. Last year, the market went into a huge slowdown after the springtime double tax credit expiration — nothing comparable has occurred in 2011. Indeed, right now, the main thing holding back the market is simple lack of inventory.

Months’ Supply of Inventory (MSI)
Part and parcel of everything indicated in earlier charts also shows up in this supply and demand statistic. MSI is very, very low — as low as it has been years, since well before the peak of the bubble.

Average Days on Market (DOM)
Average DOM before acceptance of offer is as low as it was in the bubble years. Motivated buyers in a low-inventory market are snapping up attractive new listings quickly, often in multiple-offer situations. Note that this statistic is distorted by distress sales, which often have a very high DOM, by that minority percentage of listings that sell after multiple price reductions, and by deals that fall through after offer acceptance (the listings come back on market, but the DOM clock keeping ticking). Appealing, well-priced new listings often accept offers within 7 to 14 days of coming on market.

DISTRESS HOME SALE can be one of two things: the sale of a bank-owned property typically pursuant to a foreclosure (also called an REO sale), or a so-called short sale, in which the seller-owner must get lender approval for a “short” payoff, a reduction in the loan amounts due on the property in order for the sale to close. These 2 kinds of distress sale are actually different animals, though both can be long, tiresome endeavors to close because one is dealing with bank bureaucracies. (In 2010 in California, about 40% of short sales fell through without closing sale.) However, in an REO sale, the seller is the bank (which may own hundreds or thousands of these properties), the property often looks “distressed” and the bank has very limited disclosure responsibilities (which is a liability to buyers). In a short sale, the seller is usually the individual owner-occupier, the property condition is and shows much better, and full seller disclosure laws apply (the buyer knows more about what he or she is buying). Both types of distress sale can be very good deals for savvy buyers and indeed investors are buying many of the REO properties around the country. But there are potentially greater risks and almost always greater hassle factors involved.

MEDIAN SALES PRICE is that price at which half the sales occur for more and half for less. It can be, and often is, affected by other factors besides changes in market values, such as short-term or seasonal changes in inventory or buying trends. Though often quoted in the media as such, the median sales price is NOT like the price for a share of stock, i.e. a definitive reflection of value and changes in value, and monthly fluctuations are generally meaningless. If market values are truly changing, the median price will consistently rise or sink over a longer term than just 2 or 3 months, and also be supported by other supply and demand statistical trends.

DAYS ON MARKET (DOM) are the number of days between a listing going on market and accepting an offer. The lower the average days on market figure, typically the stronger the buyer demand and the hotter the market.

MONTHS SUPPLY OF INVENTORY (MSI) reflects the number of months it would take to sell the existing inventory of homes for sale at current market conditions. The lower the MSI, the stronger the demand as compared to the supply and the hotter the market. Typically, below 3-4 months of inventory is considered a “Seller’s market”, 4-6 months a relatively balanced market, and 7 months and above, a “Buyer’s market.”

DOLLAR PER SQUARE FOOT ($/sqft) is based upon the home’s interior living space and does not include garages, unfinished attics and basements, rooms built without permit, lot size, or patios and decks — though all these can still add value to a home. These figures are usually derived from appraisals or tax records, but are sometimes unreliable or unreported altogether. All things being equal, a house will sell for a higher dollar per square foot than a condo (due to land value), a condo higher than a TIC (quality of title), and a TIC higher than a multi-unit building (quality of use). Everything being equal, a smaller home will sell for a higher $/sqft than a larger one. (However, things are rarely equal in real estate.) There are often surprisingly wide variations of value within neighborhoods and averages may be distorted by one or two sales substantially higher or lower than the norm, especially when the total number of sales is small. Location, condition, amenities, parking, views, lot size & outdoor space all affect $/sqft home values. Typically, the highest dollar per square foot figures in San Francisco are achieved by penthouse condos with utterly spectacular views in prestige buildings.


District 1: Sea Cliff, Lake Street, Richmond (Inner, Central, Outer), Jordan Park/Laurel Heights, Lone Mountain

District 2: Sunset & Parkside (Inner, Central, Outer), Golden Gate Heights

District 3: Lake Shore, Lakeside, Merced Manor, Merced Heights, Ingleside, Ingleside Heights, Oceanview

District 4: St. Francis Wood, Forest Hill, West Portal, Forest Knolls, Diamond Heights, Midtown Terrace, Miraloma Park, Sunnyside, Balboa Terrace, Ingleside Terrace, Mt. Davidson Manor, Sherwood Forest, Monterey Heights, Westwood Highlands

District 5: Noe Valley, Eureka Valley (Castro, Liberty Hill), Cole Valley, Glen Park, Corona Heights, Clarendon Heights, Ashbury Heights, Buena Vista Park, Haight Ashbury, Duboce Triangle, Twin Peaks, Mission Dolores, Parnassus Heights

District 6: Hayes Valley, North of Panhandle (NOPA), Alamo Square, Western Addition, Anza Vista, Lower Pacific Heights

District 7: Pacific Heights, Presidio Heights, Cow Hollow, Marina

District 8: Russian Hill, Nob Hill, Telegraph Hill, North Beach, Financial District, North Waterfront, Downtown, Van Ness/ Civic Center, Tenderloin

District 9: SOMA, South Beach, Mission Bay, Potrero Hill, Dogpatch, Bernal Heights, Inner Mission, Yerba Buena

District 10: Bayview, Bayview Heights, Excelsior, Portola, Visitacion Valley, Silver Terrace, Mission Terrace, Crocker Amazon, Outer Mission

Some Realtor districts contain neighborhoods that are relatively homogeneous in general home values, such as districts 5 and 7, and others contain neighborhoods of wildly different values, such as district 8 which includes both Russian Hill and the Tenderloin.

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