New Case-Shiller Home Price Index Report

This chart gives an exceedingly clear illustration of the seasonality of home price appreciation over the past 4 years. Summer/autumn plateau in 2015? It’s happened to a large degree every year since 2012. We won’t really know where the market is headed next until we see what happens in early spring 2016. (Barring some large, negative economic event before then.)

The higher priced home segment led the way in 2012 recovery in Bay Area, while the lower priced segment lagged because of having to deal with the huge hangover of the distressed property crisis. That started to equalize in late 2013 and 2014, and in 2015, more affordable homes began to overtake higher priced homes in the rate of home-price appreciation (as measured against values in January 2000). Case-Shiller is just starting to reflect a Bay Area dynamic that we’ve clearly been seeing playing out on the ground over the past year in San Francisco.

And one of our longer-term charts. Charts for the mid-priced and low-priced tiers can be found on our website. The high-price tier applies best to most of San Francisco and San Mateo, central/southern Marin, and central Contra Costa.

San Francisco New-Home Construction

The SF Planning Department just released updated Q3 information regarding the new-housing development pipeline. San Francisco is in the midst of one of its biggest new-housing construction booms in history. (The same is occurring on the commercial development side, but this report won’t deal with that.) Indeed, it often seems that new projects of one kind or another are being announced on an almost daily basis, and a detailed map delineating all projects in some stage of the pipeline makes many city districts appear to have measles.

New housing construction has lagged population pressures for decades – pressures which have soared during the current economic and employment boom – and now there is a scramble to address the inadequacy of housing supply, and, for developers/investors, to reap the rewards of a high demand/low supply dynamic in one of the most affluent and expensive housing markets in the world.

As of September 30th, there were approximately 59,000 housing units of all kinds – luxury condos, rental apartments, market rate and affordable units, and social project housing – in the relatively near-term pipeline (next 5 to 6 years). Most are in the Market Street corridor area, the Van Ness corridor just above Market Street, and in the districts to the southeast of Market Street (see map). If we add the mega-projects planned for Candlestick-Hunter’s Point, Treasure Island and Park Merced, which may take decades to become a reality, the number jumps to over 80,000. As a point of context, there are approximately 382,000 residential units in San Francisco currently. About 3500 new units were added in 2014.

Housing supply and affordability issues, strong feelings about neighborhood gentrification and tenants’ rights, and even simple NIMBYism (or in SF, NBMVism, “not blocking my view!”) make development the most contentious political topic in San Francisco. Furious battles are ongoing in the Board of Supervisors, the Mayor’s office and the Planning Department; with neighborhood associations and special interest groups; and at the ballot box. Development is not for the faint of heart or shallow of pocket: One cannot contemplate building virtually anything in the city without vehement opposition and sometimes a well-funded coalition in opposition. For developers, the equation to be penciled out includes high costs, enormous hassle-factor and extended project timelines on one side, and the potential for large financial returns on the other. In new San Francisco developments, condos often sell for $1250 per square foot and above, and 500 square foot studio apartments can rent for up to $3500 per month.

Of the units in the greater pipeline of 80,000 units, over 9000 units are designated as “affordable housing” – but about 5000 of those are in the long-term Candlestick-Hunter’s Point and Treasure Island projects. Because of the nature of the political environment, much to do with how much affordable housing will be built is in flux. Many developers are in intense negotiations with government agencies and neighborhood associations to find a workable compromise between return on investment on one hand, and unit mix and affordable housing requirements on the other. Said requirements may consist of a percentage of units in the project, building affordable units elsewhere in the city, or contributing substantial amounts to the city’s affordable housing fund in lieu of building.

New housing construction is very sensitive to major economic, political and even environmental events (i.e. natural disasters), so simply because something is in the pipeline doesn’t mean it will be completed as planned within the timeframe contemplated. First of all, plans are constantly being changed just in the normal course of things. And if a big financial or real estate market correction (or crash) occurs, as happened in late 2008, projects in process can come to a grinding halt, and new projects substantially altered, delayed or abandoned. Because the timeline in San Francisco can run 3 to 6+ years from initial filing with Planning to construction completion, developers and their lenders make enormous financial bets on what the future will look like. Timing is everything in real estate development, and can make the difference between large profits and bankruptcy. When the music stops – which it always does sooner or later, though the time range of opportunity can vary greatly – not everyone will find a chair to sit down in. That especially applies to those who over-leveraged their projects.

As a side note, big Chinese developers have been investing in both large residential and commercial real estate development projects in the Bay Area, and, according to reports, continue to aggressively seek additional opportunities. Though significant – constituting billions of dollars in investment – these projects do not constitute the greater part of Bay Area development.

Housing Affordability and Market Corrections – Paragon Report

A look at San Francisco Bay Area housing affordability trends over time and how they intersect with real estate market corrections:

The 2008 San Francisco Bay Area real estate crash was not caused just by a local affordability crisis: It was triggered by macro-economic events in financial markets which affected real estate markets across the country. It’s important to note that in the past, major corrections to Bay Area home prices did not occur in isolation, but parallel to national economic events. Ongoing speculation onlocal “bubbles” often neglect to remember this.

Still, dwindling affordability is certainly a symptom of overheating, of a market being pushed perhaps too high. Looking at the chart above, it’s interesting to note that the markets of all Bay Area counties hit similar and historic lows at previous market peaks in 2006-2007, i.e. the pressure that began in the San Francisco market spread out to pressurize surrounding markets until all the areas bottomed out in affordability. This suggests that one factor or symptom of a correction, is not just a feverish San Francisco market, but that buyers can’t find affordable options anywhere in the area. We are certainly seeing that radiating pressure on home prices occurring now, starting in San Francisco and San Mateo (Silicon Valley) and surging out to all points of the compass.

San Francisco, with a Housing Affordability Index (HAI) reading of 10% is about 2% above its all-time historic low in Q3 2007, but affordability in most other Bay Area counties, while generally declining, still remain significantly above their previous lows. By this measure, the situation we saw in 2007-2008 has not yet been replicated.

Significant increases in mortgage interest rates would affect affordability quickly and dramatically, as interest rates along with, of course, housing prices and household incomes, play the dominant roles in this calculation.

Note that Affordability ratios are just one relatively blunt measuring tool, and there are certainly other factors at play affecting our real estate market: local (high-tech boom; surging population, employment and wealth; inadequate housing supply, rental rates, etc.), national (financial markets, unemployment rates, consumer confidence, etc.) and, nowadays, even international economic factors (such as recent events in the Chinese stock markets and the EU).

Information on the methodology behind the California Association of Realtors’ HAI can be found here: www.car.org/marketdata/data/haimethodology/

Speaking of financial markets, we decided to take a look at how the recent volatility played out in the S&P 500 and the Shanghai stock indices. These indices are constantly fluctuating, but the general picture has not altered significantly since we graphed this in early November:

Interest Rates & Affordability

Interest rates have ticked up a little bit and are now just below 4%.

The Q3 CAR Affordability Index just came out: Q2 to Q3, San Francisco remained the same, at a very low 10% Index reading; Marin ticked up from 17% to 19%; Sonoma went down from 25% to 24%; and Central Contra Costa remained the same, with an Affordability Index reading of 19%.

S&P, China and the Bay Area Real Estate Market

Not so long ago, grave concern regarding the Chinese stock market decline and its effect on the U.S. economy filled the media and blogs. The words “bubble” and “crash” were used a few million times in regards to the U.S. stock market and the Bay Area real estate market. Wouldn’t it be interesting to revisit the issue to double-check how it all turned out (so far)?

The S&P has made up all the losses it sustained in the late August-September timeframe, and is now about 1.3% down from its peak in May 2015. Please note that the last three points on the first chart below are out of synch with the time scale of the rest of the chart, since they cover a period of 6 months instead of a period of 3 years (as annual data points would).

Many comparisons were made between the Shanghai stock market and the U.S. stock market. This chart below gives a little more context to exactly how similar their movements have been.