November 2011 Market Update

“Years of falling prices and falling mortgage rates have made home buying more affordable than it has been in decades. Moreover, home prices look downright cheap, not only from the perspective of mortgage rates and income, but also relative to the cost of renting or the cost of constructing a new home. Meanwhile, continued population growth, combined with lender and borrower caution, has increased pent-up demand.”

“Beyond the implications for the macro-economy and financial markets, the numbers on housing have an important message for American families today, and particularly younger families setting out on life’s great adventure: Five years ago, at the peak of the home-buying euphoria, it was emphatically a time to rent. Today, when home ownership is depreciated more than ever before, the numbers tell us it is a time to buy.”

From “Housing – a Time to Buy” by Dr. David Kelly, Chief Market Strategist for J.P. Morgan Funds, and David M. Lebovitz, Market Analyst, the J.P. Morgan Funds U.S. Market Strategy Team.

This view point is echoed by the latest Hanley Wood analysis, “Intel for a Changing Market,” which using data and projections from the Bureau of Labor Statistics, Moody Analytics, FHFA and the National Association of Realtors, predicts an accelerating recovery in employment and median household income in the Bay Area in 2012 through 2015; that national home prices have hit bottom and are beginning a recovery; and that new home sales in the Bay Area will start improving significantly in 2012.

We don’t know what the future holds, but certain signs point to a recovery in process: rising rents in the city; incredibly low interest rates, which impact the ongoing cost of housing enormously; increasing high-tech and bio-tech employment in the Bay Area; the beginning of an upswing in the Case-Shiller Index; and strong buyer demand and low inventory of homes for sale since the beginning of 2011. Of course, national and international economic conditions are still uncertain and fragile, and some pundits predict further declines. But if current circumstances continue, this might indeed turn out to be a very good time to buy, comparable to the early 1990’s when the market went through another huge correction, a flat lining in values that lasted several years, and then a return to significant appreciation. As always, it is up to you to come to your own conclusions.

Statistics are generalities, subject to fluctuation due to a variety of reasons. All information herein is derived from sources deemed reliable, but may contain errors and omissions, and is subject to revision. Except for the Case-Shiller data, sales not reported to MLS are not included in this analysis.

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Houses and condo sales make up the large majority of overall property sales in San Francisco. Stock cooperatives, or co-ops, are a very small and distinct market segment in SF, mostly found in the most expensive neighborhoods (though very common in Manhattan). TIC sales have picked up in recent quarters as financing conditions have stabilized. The multi-unit market is divided into 2-4 unit buildings, in which buyers typically plan to owner-occupy at least one unit, and 5+ unit buildings, where the buyers will most likely use the property as a rental income investment.

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Sales by Price Range
An overview of the price breakdown of home sales in San Francisco. The vast majority of distress sales (bank-owned property and short sales) occur in the lower price points (and generally speaking, the less affluent neighborhoods), and that is where they affect values the most. Once you get above the overall median price, distress sales make up a very small percentage of sales and have little effect on values. What is called the luxury home market usually constitutes just under 10% of the market.

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Percentage of Listings Accepting Offers
This statistic is an excellent one to measure demand vs. supply, and ever since February the percentage has been running at its highest in years. October had a very high percentage of listings going under contract, 23%, versus the 14% of October 2010. Typically, the market will start slowing down soon for the holidays.

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Months Supply of Inventory (MSI)
MSI has been bumping along at what are historically very low levels of inventory since the beginning of the year, reflecting high demand and low inventory. On October 31st, there were almost 700 fewer listings on the market when compared to the same day of 2010, a huge reduction in supply.

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House Sales: Average Dollar per Square Foot
This chart is not proportional to the timeline but it gives a sense of value trends in various neighborhoods since the year 2000. The city’s southern district 10, running from Bayview to Crocker Amazon, has been most affected by distress sales and has thus seen the greatest percentage drop in values, over 30%. The central and northern districts, where distress house sales have not played a large role in the market, have seen declines more in the 15% – 22% range since peak values.

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Median Condo Sales Prices
This graph is not proportional to the timeline, but it gives a good idea of trends in value over the past 11 years. As new-development condo sales have dwindled, the SoMa and South Beach area have seen a steady increase in median sales prices in the last 2 years. For our complete report on values by neighborhood:
Values by Neighborhood

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Prestige Northern Neighborhoods
The neighborhoods across the very north of the city are its most expensive: running from Telegraph Hill through Russian Hill and Pacific Heights through to Sea Cliff. This is a very general snapshot because values vary between the many neighborhoods (and sometimes the actual number of sales is relatively small), but if you ignore the quarterly fluctuations up and down, and look at the general trend lines, you get the idea of the decline in values from 2008 and the relative stability for the last couple years. For our luxury home report:
Luxury Home Report

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Noe Valley/ Castro/ Haight District
The months supply of inventory here has been bumping along at historically very low levels for the last 12 months, reflecting the strong buyer demand and the limited supply of homes for sale in this area of the city. For our complete report:
Noe/ Castro/ Haight Report

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Sunset/ Parkside
112 houses sold in the Sunset/ Parkside district in the 3rd quarter; 14% of those sales were distress sales. Taken separately, the median sales price for distress houses was $610,000 and for regular, non-distress house sales, $714,000. The average days-on-market for all house sales in the last quarter was a relatively low 50 days. In October, the months-supply-of-inventory was a very low 2 months, and those homes selling without price reductions have been averaging a sales price a tiny bit over the asking price.

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SF Richmond District
There were 34 house sales in the Richmond district in the 3rd quarter, of which 15% were distress sales. If we strip out distress sales, the median price soars to $935,000, the highest in years (but the data set of sales is small and the variety of homes selling is large). In October, the days-on-market number was a very low 30 days, the lowest in years; and the months-supply-of-inventory was extremely low at 1.7 months.

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SoMa/ South Beach/ Mission Bay
There is an enormous difference between the median sales prices of distress condos and non-distress condos in this area, where the huge majority of new condo construction occurred over the past 15 years. Distress condo median prices continue to fall, while non-distress prices have been relatively stable within a $50,000 range for years now. Distress sales made up over 30% of sales here for the last 4 quarters, but distress and non-distress typically act as different markets. For our complete report:
SoMa/ South Beach Report

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Case-Shiller High Tier Home Price Index
In the most recent Index, for August 2011, the low and middle price tiers for the 5-county SF Metro Area showed small declines in values, while the high price tier pretty much leveled off, after 5 months of consecutive increases. (Actually, the high price tier went up the tiniest bit in August, but not enough to change the rounded-off reading from 144.3.) It is the high price tier that is most applicable to the city of San Francisco. For our complete report on the Case-Shiller Index:
Case-Shiller Deciphered

“There are three kinds of lies: lies, damned lies and statistics.”
Benjamin Disraeli

Statistics without informed context are usually worthless, easily manipulated and often misleading.

One can make virtually any case — positive or negative — by choosing a single average or median statistic relating to a short period of time and a small data set, and then cherry picking what you’re comparing today’s data to (last month, last year, or the peak of the market). Conversely, too large a data set may be misleading: the overall national trend may misrepresent California’s, and the state’s can be different from the Bay Area’s, the Bay Area’s from the city’s, and within San Francisco itself, distinct neighborhoods are often different markets going in significantly different directions.

In particular, absent some huge economic event, such as the September 2008 financial markets meltdown, monthly fluctuations in median home sales prices are usually meaningless. Median prices often fluctuate up and down within a 5 to 10% range from one month to the next, even in stable markets.

One can only be sure market values are trending up or down if that trend is consistent over the longer term, minimally 4 to 6 months. Any definitive trend in prices and values should also be reflected in other market statistics such as average dollar per square foot, days on market, months’ supply of inventory, percentage of listings accepting offers, percentage of distress sales, and so on.

When assessing market changes calculated by computerized algorithms using very general data sets – such as Case Shiller’s or Zillow’s — one should be clear on the details. For example, the Case Shiller Index for “San Francisco” reflects an analysis of a “metro area” comprising 5 counties with wildly varying markets (Pinole to Pacific Heights). And for the city of San Francisco, one should look at the Case-Shiller “High Tier” price Index, not the general Index. It also makes sense to assume a sensible margin in error. As an egregious example, Zillow’s property valuations usually build in a 25% margin of error on either side of their “Zestimate” of value. A 1-3% value change indicated by the Case Shiller overall home Index for the SF metro area, then applied by a commentator to condo values in SOMA or house values in the Marina, should be taken with a grain of salt.

Always look for consistent, longer term trends across a wide range of market quantifying statistics.

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. The median sales price for homes (in all their infinite variety) is not like the price for a share of stock (all the same), and monthly fluctuations in median price 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. 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.

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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