San Francisco: An Exceptional Real Estate Market

We are often asked why our analyses seem so out of whack from media reports, so much more positive than the general drumbeat of doom. There are several reasons: the media usually deals with more general data (national, state, Bay Area) while we focus on the city of San Francisco itself or even its specific neighborhoods (which of themselves are often very different markets); there is also the grievous lack of context in the media (a polite way of saying that they often don’t know what they’re talking about); and their unfortunate preference for bad news. But perhaps the biggest reason is that San Francisco and to some extent, much of the Bay Area, is simply an exceptional market. Though subject to the greater economic conditions other places are, the city is often not as negatively impacted to begin with and then recovers sooner.

Here is a good quote from the chief economist for Wells Fargo, John Silvia, formerly chief economist for the Senate Banking Committee: “San Francisco is becoming more like London / Paris and a lot less like Denver…It’s a city that doesn’t add a lot of people, but the people it’s adding to the metropolitan area are very well-paid people…The city will grow good paying jobs in health care, education, leisure, hospitality and information technology, which will cause property values and rents in San Francisco to go up.”

In one category after another, SF or the Bay Area ranks at or near the very top: degree of education, number of world-class universities, affluence, quality of life, environmental consciousness, places people want to visit, culture and sheer natural beauty. In a recent study of innovation (patents per population), 4 of the top 6 cities in the country were in the Bay Area. Recently, 5 Bay Area counties have accounted for almost 50% of all the new jobs in the entire state. San Francisco’s foreclosure rate is among the lowest in the nation. Venture capital investment remains strong. The roster of high-tech and bio-tech companies headquartered around us is unparalleled – many of which are growing rapidly and many of whose employees want to live in San Francisco, a small city with a very limited supply of housing. And now, with apartment rents climbing rapidly, interest rates at their lowest in history, and prices generally 15% – 25% off their peaks, the buy vs. rent equation is at its most attractive in many years.

And that makes San Francisco and its real estate market different from the rest of country.

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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Case-Shiller High Price Tier Index
As David Blitzer of S&P said, “Continued increases in home prices through the end of the year and better annual results must materialize before we can confirm a housing market recovery.” But we’ve now seen the 5th consecutive monthly increase in the SF MSA High Tier Price Index, which is a good sign. July’s index was released in late September. For a complete analysis:
Case-Shiller Deciphered

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San Francisco Homes Market: September Snapshot
Many fewer listings than last year, but more listings accepting offers: the supply and demand dynamic has tightened significantly – a situation that began earlier this year. The current supply of new listings is simply not keeping up with buyer demand and multiple offer situations are not uncommon. Typically, this would apply upward pressure on prices – which it is in some, but not all, of the city’s neighborhoods. (Different neighborhoods can have very different market conditions.) MLS sales in the third quarter were up 7% from last year, with 16% fewer homes for sale: sales are clearly being constrained by low inventory. Closed sales lag accepted offer-activity by 4-8 weeks.

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SF Median House Sales Prices
Distress sales (bank-owned and short sales) make up about 20% of the house market in SF, but they’re clustered in the less affluent neighborhoods and in the lower price ranges. Even as the median sales price for distress houses has bottomed out, that of regular, non-distress houses has increased in the past 2 quarters. Please see the definition of and caveats about this often misunderstood statistic at the bottom of this newsletter. One wants to see consistent long-term trends before jumping to conclusions about changes in home values.

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SF 3-Bedroom House Values
Low, high and median sales prices; average size; and average dollar per square foot. For our complete report:
Values by Neighborhood & Property Type

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SF Median Condo Sales Prices
The median sales price of distress condos (about 18% of the SF condo market) has bottomed out, while the median for non-distress condos has fluctuated up and down by quarter, generally within a relatively narrow 5% band since the 2008 market adjustment. Since median prices are often affected by other factors besides changes in value, this probably represents a general stability in prices more than anything else. One would wish to see a consistent long-term trend to come to any conclusions about changing condo values.
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Percentage of SF Listings Accepting Offers
This is one of the clearest statistics of supply vs. demand and for virtually every SF property type the percentage is hovering around its highest level since 2008.
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Sales Price to Original Price, Days on Market, Price Reductions
Well-priced, well-prepared, well-marketed homes are selling quickly at, a little over or very near their asking prices. Properties that go through 1 or more price reductions take much longer (typically over 2 months longer) to sell and sell at a large discount (average 12%) off original price. And though expired listings are at historical lows, for every 2 listings that sell, another listing expires without selling. Even in high demand/ low supply market, many listings still do not sell, typically because they’re perceived as overpriced.

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Months Supply of Inventory (MSI)
The lower the MSI, the hotter the market. Since the year began, the MSI for SF houses and condos has been bumping along at virtually their lowest levels ever. For houses, the hottest market segment, the MSI in September was an incredibly low 2.6 months (in some specific neighborhoods, it’s even lower); for condos, it was 3.3 months; for TICs, 4.6 months; and for 2-4 unit buildings, 3.9 months.

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Average Days on Market (DOM)
This statistic can easily be distorted by distress sales and deals that fall through. For example, for non-distress houses the DOM was 57 days in September, while distress houses had an average DOM of 81 days; distress condos had an average DOM of 112 days. For what it’s worth, the overall average DOM in September, after climbing during the summer months, was about 60 days, which is as low as it’s been for quite some time. However, the majority (of sold listings) sells without price reductions and typically accepts offers within 2 to 3 weeks of going on market.
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SF Distress-Home Market
The number of distress home listings has been generally declining since the 4th quarter of 2010. Because of a number of factors – location, condition, price, the aggravation of making the deal – the distress home and regular home markets are generally different markets in SF, and often don’t affect one another’s values. Though distress home listings can now be found throughout the city, they are concentrated in particular neighborhoods hit hard by the foreclosure crisis, where they dominate the lower price ranges.
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Mortgage Interest Rates
Defying all predictions, interest rates fell to yet another historic low in early October, going below 4%. This has huge ramifications for the ongoing cost of home ownership, and along with rising rents in San Francisco, has been altering the rent vs. buy equation significantly. To perform your own rent vs. buy calculations:Rent vs. Buy Calculator

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. 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.