A double dip for San Francisco real estate?

Note: You may skip the analysis below and jump straight to the market dynamics charts following.

For the past 2 years, new predictions for additional, significant (10-30%) price declines – the so-called double-dip in home values – have been made on an almost weekly basis. The reasons: turmoil in financial markets, foreclosures, shadow inventory, debt crises, jobs, China, oil, the groundhog saw its shadow. For many of these pundits, analysts and bloggers, the market is always bad and about to get worse. Good stuff for headlines. Frankly, it’s a little disturbing how many people take pleasure in, even gloat over, the idea of everything always getting worse. (See the comments section on any online real estate article.)

That is not to say they’re never right, much less those real estate agents who believe it’s always “the best time to buy.or sell.” What’s missing most often from the articles, blogs and predictions is context; in-depth market expertise; and understanding of location, inventory, seasonality and how buying trends can change (without necessarily affecting values). Instead, typically a single statistic, poorly understood, is seized upon to trumpet a conclusive unified theory of US, California, Bay Area or SF markets.

What will happen tomorrow in the San Francisco home market? Don’t know. Has there been a significant decrease in values since prices stabilized after the big decline of late 2008? No. Is a double-dip possible? Yes, the future is full of unknowns.

But is a double-dip likely?

Ever since the large drop from 2007-2008 peak values – 15% – 25% in most of the city’s neighborhoods – median prices in SF have been generally stable: indeed, median prices for both houses and condos in 2009 vs. 2010 were virtually unchanged. Which suggests we may have hit the bottom of this cycle. Also, San Francisco, especially its better neighborhoods, has a miniscule rate of foreclosures when compared to the state and Bay Area overall. Though some of our least affluent neighborhoods were badly hit, the predicted tsunami of foreclosures never arrived, and it seems unlikely to show up now.

MONTHLY FLUCTUATIONS IN MEDIAN PRICE ARE MEANINGLESS.

Even in a stable market, median prices will jog up and down by 1-5%, because there are a number of factors besides value which affect them in the short term. It is what occurs consistently over the longer term that indicates a verified market trend. The computer generated algorithm one constantly hears about, the Case-Shiller index, may be the best available, but is still a very blunt analytical tool for something as diverse as the values of specific (relatively unique) homes in specific (relatively unique) locations. Yet it’s treated as a precision measurement – “According to Case-Shiller, home values fell [exactly] 3.7% last month” – when, at minimum, a 5% +/- margin of error should be assumed.

Consider this: the Case-Shiller index for the “San Francisco Metro Area” comprises 5 counties, encompassing wildly different markets from Pacific Heights to Martinez, Hillsborough to the Tenderloin, areas with 50%+ foreclosure rates and those with less than 3%, but every month, a percentage change calculated to one tenth of one percent is delivered as generally applicable to all.

To be repeated endlessly in articles and blogs as gospel truth.

If the market is indeed strengthening, instead of being on the cusp of another crash, what might be the reasons?

    1. A growing suspicion that, 2 ½ years after the crash, the SF market has bottomed out price wise. If true, that makes it an excellent time to invest. 

    2. Indications that consumer optimism about the economy has finally turned a corner. Nothing impacts market dynamics more.

    3. Very low interest rates that have recently started to rise. (Very motivating for buyers.)

    4. Reduced inventory: among other things, the city’s flood of new condo units over the past decade is slowing to a trickle, and that will not change for years.

    5. An influx of young, new buyers, from Bay Area companies such as facebook, Google, Apple, Twitter and Zynga, who strongly desire to live in San Francisco. And who suddenly have a lot of money.

    6. The stock market: SF buyers are relatively affluent (by necessity considering our prices); when the stock market climbs considerably, as it has, they benefit most.

    7. That old canard: San Francisco is one of the most beautiful cities in the world. It is only 7 miles by 7 miles and cannot grow larger. SF is the center for flourishing high-tech, biotech and financial industries in one of the most educated and affluent areas on the planet. Our market has always been different: it usually declines last and recovers first.

 

Statistics without informed context are worthless. (“There are 3 kinds of lies: lies, damned lies and statistics.”) Below are charts of market activity in San Francisco, as reported to MLS, within the context of longer term trends. They look at the SF home market by 9 different statistical parameters. The median price charts and the distress sales chart show long term stability. Every single one of the other market dynamics charts describes a strengthening market.

Still, predicting the future is tricky. And it’s still too early to identify a lasting, definitive trend. As always, it is up to you to reach your own conclusions and act accordingly.

Statistics are generalities, subject to fluctuation due to a variety of reasons. Sales not reported to MLS are not included in this analysis. All information herein is derived from sources deemed reliable, but may contain errors and omissions, and is not warranted.

Paragon Real Estate Group
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Percent of SF Listings Accepting Offers
Due to strong buyer demand and relatively low inventory levels, February saw the highest percentage of listings accepting offers in years. This chart is for SF house and condo sales.

Paragon Real Estate Group
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Months’ Supply of Inventory (MSI)
Months’ Supply of Inventory measures how long it would take to sell the existing inventory of homes for sale at current rates of activity. The lower the MSI, the stronger the market. This chart measures MSI for SF houses and condos. At 2.6 months of inventory, February 2011 saw the lowest MSI in years.

Paragon Real Estate Group
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SF Homes for Sale
The number of homes for sale remains relatively low even for February.

Paragon Real Estate Group
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New Listings Coming on Market
The number of new listings coming on market remains relatively low.

Paragon Real Estate Group
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Average Days on Market
Days on market measures how long it takes a listing to accept an offer. The average is often distorted by a relatively small percentage of listings that take a very long time to sell. Over 60% of SF home listings accepting offers actually do so within 7 to 30 days. In any case, February’s figure was among the lowest in the past 2 years.

Paragon Real Estate Group
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Distress Home Sales
This chart shows the number of bank-owned sales and short sales of SF condos and houses. For the past 20 months that number has generally fluctuated between about 60 and 70, and has shown no signs of dramatically increasing. Most of these sales occur in the lower price ranges and often in the least affluent neighborhoods — hit hardest by foreclosures. The more affluent SF neighborhoods have not been significantly affected by distress sales.

Paragon Real Estate Group
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Median Sales Prices for 2-3 BR Houses
This chart shows the median sales price for 2 & 3 bedroom houses in SF, by quarter, over the past 3 years. After the big decline of late 2008/ early 2009, the median price has stayed within about a 5% margin for 7 quarters. The median for the 4th quarter of 2010 was virtually the same as that of 3 other quarters, with the other 3 a bit up or down. The chart shows a remarkable stability in median sales price over a long term period of sales.

Paragon Real Estate Group
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Median Sales Prices for 2 BR Condos
The same median sales price stability shown in the previous chart for SF houses also shows up for 2 bedroom condos in San Francisco. Again, the big decline in late 2008, and the relatively minor ups and down since. The median price in the 4th quarter of 2010 was virtually the same as 3 other quarters, with the other 4 quarters being slightly lower.

Paragon Real Estate Group
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Sales Price to Original List Price by Price Reductions
The darker bars show the percentage of sales price to original list price of houses that accepted offers without a price reduction. These homes typically sold quickly and, on average, for a tiny bit over the asking price. This reflects the majority of houses accepting offers in any given month. The lighter lines show the discount to original list price when a property stays on the market longer and goes through one or more price reductions. Typically, another 30 – 40% of listings expire without selling due to being perceived as overpriced.