The Economic Context Behind Housing Market Trends

The real estate markets in the SF Bay Area are parts in an overall economic reality that includes a number of financial, demographic and psychological components – all of which are impacting each other in constantly changing ways. Some are local, and others reflect national or even international events or trends. They often run in parallel, but can also diverge or reverse themselves very suddenly. Below are snapshot analyses of what we see as major cogs in this economic machine.

In some charts, we use specific data for San Francisco itself, but the trends seen there – such as home price appreciation, employment and housing affordability – are playing out, to varying degrees, throughout the Bay Area. That is, we believe these economic context illustrations generally pertain to the entire region.

Sudden, Dramatic Population Growth

Spectacular Employment Growth

The Bay Area has had the strongest employment trends in the nation, adding approximately 600,000 new jobs in the past 7 years. As illustrated below, San Francisco alone has added about 100,000 in that time period. All these new people need somewhere to live, and many of these new jobs are very well-paid. Note that after dropping in early 2016 (per the economic cooling to be discussed later in this report) and then climbing back up again in the second half of 2016, hiring has basically plateaued in 2017. (Too much should not be made of short-term data.)

New Housing Construction

Though ramping up in recent years, new housing construction has not come close to meeting the needs of a rapidly increasing population. Most of the recent new construction would not be considered “affordable,” as developers have concentrated on more expensive condo and apartment construction. So while helping to fill an urgent need for new housing, it has not really helped less affluent, normal-working-class segments of the population.

New Housing Pipeline

A snapshot of what is currently in the pipeline for new construction in the city. 3 huge, long-term projects make up a big percentage of units planned. Note that the pipeline is constantly changing: new plans submitted, and existing plans changed or even abandoned. Just because something is in the pipeline does not mean it will end up being built. Economic downturns typically shut down new development plans very quickly.

Mortgage Interest Rate Decline

The 35% to 45% decline in interest rates since 2007 has played an enormous role in real estate markets, in effect subsidizing much of the home price increases seen in the past 6-7 years. Since the 2016 election, rates first jumped up 23% and then declined again to, historically, very competitive rates below 4%. The fear that rates might rise again soon may have been one factor behind the feverish spring 2017 markets seen around the Bay Area. It is notoriously difficult to predict interest rate movements with any confidence.

Consumer Confidence

The monthly fluctuations in consumer confidence reported on in the media are relatively meaningless and without context, but longer-term movements are much more meaningful to overall economic trends. Psychology – confidence, optimism, fear, pessimism – often plays a huge role in financial and real estate markets. And events can sometimes turn consumer confidence one way or another very rapidly, whether such movements are rational or not.

New Wealth Creation: Initial Public Offerings

Besides the effect of increased, well-paid employment, the sudden creation of brand new wealth has been a very, very big factor in Bay Area real estate markets. IPOs can create tens of thousands of residents who suddenly feel much, much wealthier, and that impacts home buying. Local IPO activity increased through mid-2015, pouring hundreds of billions of new dollars into the economy, and then suddenly stopped in its tracks when financial markets suddenly became very volatile in September 2015. This particularly affected the high-end homes segment: Not only were new millionaires not being minted by the dozen, but the affluent are typically most sensitive to financial news and market volatility.

The Bay Area has an astounding pipeline of possible IPOs in the not too distant future – Uber, Airbnb, Palantir and Pinterest, to name a few of the biggest. If and when these companies go public, and how the IPOs are received, are a real wildcard for the region’s real estate markets. There is the potential to unlock tremendous wealth held in relatively non-liquid private equity into billions of spendable dollars. On the other hand, if there was a dotcom-like implosion, the effects would be quite serious. (We don’t expect such an implosion, though a sudden financial crisis could still have significant negative ramifications, especially for currently unprofitable start-ups.)

New Wealth: Stock Market Appreciation

The gigantic surge in the stock market over the past 9 years has also made people feel much wealthier, which, besides making new money available to purchase a home or a bigger home, stimulates consumer (and venture capitalist) confidence, which feeds yet more positive energy into the markets.

Financial Market Volatility

The above S&P chart smoothed out all the volatility to illustrate the overall steady climb in stock market values since 2009. Below is a snapshot of the volatility that occurred from autumn 2015 to late summer 2016 (with an allusion to the big jump that has occurred in 2017 YTD): stock markets plunged in September 2015 to recover fully by November, then plunged again in January 2016 to recover again by April. Then came a smaller response to the Brexit vote. This volatility affected IPOs, venture capitalist confidence (to continue funding start-ups), hiring, and real estate markets, especially of more expensive homes. One local, respected economist predicted in late 2015 that soon “there would be blood in the streets of San Francisco” from a collapse in high-tech and housing booms. Then financial and real estate markets, hiring, VC and consumer confidence bounced back dramatically in 2017, and he revised his estimate for streets filled with blood to 2019 or 2020.

Residential Rents

Again, this chart is for San Francisco, but similar trends occurred throughout the Bay Area. Soaring population and employment without a concomitant increase in housing supply made rents soar to the highest in the nation. Extremely high rents (with no tax, equity accrual or appreciation benefits) make many people think of buying as a better financial alternative. Rents declined from a peak in 2015 due to increased supply (new apartment buildings coming on market) and a softening in high-tech hiring through mid-2016. In 2017, there are some preliminary signs of a recovery, or at least that the decline in rent rates has, for the time being, stopped.

 Supply: New Listings Coming on Market (SF)

A very significant change has occurred in real estate markets locally and nationally: Homeowners are selling their homes much less frequently. There has been a general decrease in population mobility (people moving for new jobs), a substantial increase in the average age of homeowners (older people move less often than younger), and an increase in owners renting out homes instead of selling (helped by the big drop in interest rates and the big jump in rents). If demand increases for all the reasons mentioned earlier – demographic shifts, new wealth, new jobs, more confidence – but the number of homes being put on the market declines, that creates the pressure that leads to higher home prices.

Months Supply of Inventory (MSI)

MSI is a statistic that takes into account both buyer demand and the supply of homes available to purchase. The lower the MSI, the greater the competitive pressure on prices: Very low MSI figures, such as we have been seeing around the Bay Area in almost all market segments, means that there are too many buyers for the number of homes on the market. This leads buyers to bid against one another: Nothing leads to higher prices more quickly than this dynamic.

Median Home Price Trends

This chart is for SF, but the entire Bay Area has seen similar upward swings in home prices since 2012. In many ways, this chart is the result of everything that has been illustrated in previous charts in this report. However, it should be noted that the very considerable appreciation in home values has also increased the wealth of much of the population, which feeds back into the financial and psychological loops.

Real Estate Appreciation Cycles

This very simplified, smoothed-out graph illustrates the percentage ups and downs in home prices over the past 30+ years per the S&P Case-Shiller Home Price Index for “high-price-tier” homes in the Bay Area: High-price-tier homes predominate in most of SF, Silicon Valley and Marin County, as well as in enclaves in other counties. Like other financial markets, real estate markets are subject to cycles. However, they are hard to predict because there is no hard and fast rule as to how long cycles will run. Booms can last longer than expected, or suddenly get a second wind, and downturns can come out of nowhere. There are so many churning, interactive economic, political and ecological factors in the mix nowadays, running from local events in the Bay Area to developments in China, Europe, North Korea and Middle East.

Bay Area vs. National Appreciation Trends

What has happened home prices in the Bay Area has also been occurring generally in the country, though our high-tech/bio-tech/fin-tech boom has certainly goosed appreciation here. However, it is interesting to see, that for the most part, the trends are quite similar over recent decades, with divergences for the 1989 earthquake, the dotcom boom and bust, and the most recent recovery. It will be interesting to see if the trend lines converge again as has happened in the past.

San Francisco Housing Affordability

All the factors that have pushed up home prices have pushed down affordability. San Francisco and San Mateo Counties have the lowest housing affordability percentages in the state (and maybe the nation), but affordability has been rapidly declining around the Bay Area. When affordability gets too low, it starts to throw a wrench in some of the other components, like population and hiring. People and companies start moving away, poverty increases, start-ups start up elsewhere, rents begin to soften, and so on throughout the economic ecosystem. Housing affordability may be the biggest social, political and economic issue facing the Bay Area right now.

With statistics, one is almost always looking in the rear-view mirror, and, as anyone reading the news during the past year knows, the future is an unknown country. As they say in the standard disclaimer, past performance is no guarantee of future results.

All our many Bay Area real estate analyses can be found here: Paragon Market Reports

It is impossible to know how median and average value statistics apply to any particular home without a specific, tailored, comparative market analysis. In real estate, the devil is always in the details.

These analyses were made in good faith with data from sources deemed reliable, but may contain errors and are subject to revision. It is not our intent to convince you of a particular position, but to attempt to provide straightforward data and analysis, so you can make your own informed decisions. Median and average statistics are enormous generalities: There are hundreds of different markets in San Francisco and the Bay Area, each with its own unique dynamics. Median prices and average dollar per square foot values can be and often are affected by other factors besides changes in fair market value. Longer term trends are much more meaningful than short-term.

Luxury HOUSE Market Update for San Francisco

The autumn selling season is a big one for the San Francisco luxury house market: Last September saw a record-breaking spike in new listings hitting the market, leading to a similar spike in October sales. It will be a couple months before we begin to get definitive statistics on listing and sales activity in September and October 2017, but in the meantime we can review the market conditions and trends as they have developed over recent years. This report will pay particular attention to the different neighborhood markets within SF.

We typically use $3,000,000 as the price threshold for the luxury house market in San Francisco: That approximately defines the top 10% of the market. The ultra-luxury segment starts at $5 million, which constitutes the top 2.5% of sales. Of course, what one gets in the different neighborhoods for the same price can vary dramatically: A fixer-upper in Presidio Heights may go for the same price as a large, gracious mansion in St. Francis Wood in move-in condition. In real estate, the devil is always in the details.

Link to our update on the SF luxury CONDO market
All Paragon reports can be found here

Overview: Listing & Sales Activity

As of mid-month, 29 new luxury house listings priced at $3m+ have come on the SF market since the beginning of September, so it looks like it may be another big month for new listing activity. Of those 29, 4 had already accepted offers by 9/15/17.

If you wish, you may skip our summary and jump to additional graphed analyses further below.

MARKET SUMMARY

The luxury real estate market is impacted by a number of factors: positively, by improvement in general economic conditions and confidence, highly-paid employment and population growth, and especially, by the creation of new wealth in large quantities. All these elements were dynamically present in the Bay Area from 2012 through mid-2015. Then significant economic and political volatility put a damper on luxury home sales: Chinese stock market turmoil, the crash in oil prices, Brexit, large U.S. stock market swings, as well as an apparent cooling in our high-tech boom, all injected uncertainty into financial and our luxury real estate markets. Furthermore, Bay Area high-tech IPOs, which had created a stupendous amount of new wealth since 2011, basically dried up – and newly rich or further enrichened buyers have played a big role in demand.

These changes in the economic environment caused the SF luxury home market to cool in autumn 2015. Generally speaking, the segment most affected was the market for re-sale luxury condos, particularly in those districts where big, new-construction, projects are concentrated. There has been very little new, luxury house construction in the city – only about 8 to 10 per year built since 2000 (as opposed to many thousands of new condos), which is one reason the SF house segment has generally been stronger than that for condos.

Then in October 2016, after a sudden huge surge in listings, SF luxury house sales hit a new high in sales volume, and in June 2017, the luxury condo market suddenly hit a new high as well. However, neither segment is as strong, as measured by standard market metrics, as it was during the 2014 to mid-2015 peak of market heat. Many of the statistics in this report reflect a similar trend: The market getting increasingly hotter 2012 through mid-2015, cooling from autumn 2015 through most of 2016 (during substantial financial market and political volatility), and then strengthening again in late 2016 and 2017. Now we are waiting to see how the autumn 2017 luxury home market shakes out.

Overview: Dollar per Square Foot Values

Overview: Average Days on Market

Overview: Months Supply of Inventory

San Francisco Luxury House Market
by Neighborhood & District

Median Sales Prices & Avg. Dollar per Square
Foot Values by District

Luxury House Listings & Sales Volumes by District

In the past 6 years, the Noe, Eureka & Cole Valleys district has seen very considerable growth in the luxury house segment. To a large degree, this shift began in the last few years of the previous millennium, when the dotcom boom suddenly erupted. Among other issues, the recent high-tech booms have somewhat changed the demographics of Bay Area wealth and of the SF luxury home buyer, and the lower-key neighborhood ambiance many younger, newly affluent buyers prefer. Another factor is that this district is much closer to highways south to the peninsula and the head offices of many high-tech giants than the wealthy northern neighborhoods. All in all, it constitutes a totally different choice from neighborhoods like Pacific Heights and Russian Hill, and from the newer, luxury high-rise condos of South Beach-SoMa, each of which appeals to a different, but substantial segment of buyers.

Top Luxury House Districts: Months Supply of Inventory

Top Luxury House Districts: % of Sales Accepting Offers within 30 Days

Top Luxury House Districts: % of Sales over List Price

Top Luxury House Districts: Listings Taken Off Market without Selling

Ultra-Luxury House Sales in San Francisco
The Top 2.5% of Sales, $5m+

The most expensive house sales are clustered in the Pacific & Presidio Heights district, with typically a handful-plus sales each in the Russian, Nob & Telegraph Hills district and the Noe, Eureka & Cole Valleys district (which includes Ashbury Heights and Buena Vista Park). Every now and then a huge Alamo Square mansion will sell in this price range. Russian Hill and Sea Cliff have very few house sales in any given year, but they sometimes sell for prices well over $10m.

Please let us know if you have questions or we can be of assistance in any other way.

Link to our update on the SF luxury CONDO market
Our complete SF luxury real estate report
All Paragon Bay Area market reports

It is impossible to know how median and average value statistics apply to any particular home without a specific, tailored, comparative market analysis. In real estate, the devil is always in the details.

These analyses were made in good faith with data from sources deemed reliable, but may contain errors and are subject to revision. It is not our intent to convince you of a particular position, but to attempt to provide straightforward data and analysis, so you can make your own informed decisions. Median and average statistics are enormous generalities: There are hundreds of different markets in San Francisco and the Bay Area, each with its own unique dynamics. Median prices and average dollar per square foot values can be and often are affected by other factors besides changes in fair market value. Longer term trends are much more meaningful than short-term.

© 2017 Paragon Real Estate Group

Luxury Condo Market Report for San Francisco

The autumn selling season is a big one for the San Francisco luxury homes market: There is usually a very significant spike in activity between Labor Day and the beginning of the mid-winter slowdown in mid-November. It will be a couple months before we begin to get definitive statistics on listing and sales activity in September and October, but in the meantime we can review the market conditions and trends as they have developed over recent years. This report will pay particular attention to the different neighborhood markets within SF.

We usually use $1,850,000 as the price threshold for the luxury condo, co-op and TIC market in San Francisco: That approximately defines the top 10% of the market. The ultra-luxury segment starts at $3 million, which constitutes the top 2.5% of sales. Of course, what one gets in the different neighborhoods for the same price can vary dramatically: The city has an enormous range in locations, architectural styles, views and amenities.

All our Paragon reports can be found here

Condo, Co-op & TIC Sales over $5m
2017 YTD SF MLS Sales

Overview: Listing & Sales Activity

As of mid-month, 49 new luxury condo, co-op and TIC listings have come on the SF market since the beginning of September, so it looks like it may be a record-breaking month for new listing activity.

If you wish, you may skip our summary and jump to additional graphed analyses further below.

MARKET SUMMARY

The luxury real estate market is impacted by a number of factors: positively, by improvement in general economic conditions and confidence, highly-paid employment and population growth, foreign buyers, and especially, by the creation of new wealth in large quantities. All these elements were dynamically present in the Bay Area from 2012 through mid-2015. Then significant economic and political volatility put a damper on the market: Chinese stock market turmoil, the crash in oil prices, Brexit, the U.S. presidential election, as well as an apparent cooling in our high-tech boom, all injected uncertainty into financial markets and our local luxury real estate market from late summer 2015 to late autumn 2016. Furthermore, Bay Area high-tech IPOs, which had created a stupendous amount of new wealth since 2011, basically dried up during this period – and newly rich or substantially enrichened buyers had played a big role in demand.

Generally speaking, most affected was the market for re-sale luxury condos, particularly in those neighborhoods where big, new-construction projects are concentrated and dramatically increasing supply. It is hard to get definitive data on new-project sales activity, but it is believed to have softened as well with the overall jump in listings, all competing for the same buyers.

However, in June 2017, the SF luxury condo market suddenly hit a new high in sales volume. This accompanied feverish spring real estate markets around the Bay Area, though the more affordable segments were most frenzied, and house markets somewhat hotter than condo markets. Consumer confidence climbed, interest rates remained low and the stock market soared to new heights.

The biggest shift in the luxury condo market has been the dramatic year-over-year drop in sales reported to MLS in the greater South Beach-SoMa district, even as listing inventory there has hit new highs. As illustrated below, by virtually every market indicator – months supply of inventory, average days on market, and others – it is the softest luxury condo market in the city. This is the area where many big, new projects continue to come on market, and, to some degree, they are probably cannibalizing MLS sales as they aggressively compete with the resale market. This is also the district where the unfortunate issues at the Millennium Tower (slight sinking and tilting; multiple lawsuits) are being extensively reported upon. On the other hand, the high-end condos that do sell in this district still often achieve the highest dollar per square foot values in the city.

The Pacific Heights-Marina district and the Noe, Eureka (Castro) & Cole Valleys district have much stronger supply and demand statistics in their high-end condo markets, with the greater Russian & Nob Hills district a bit cooler.

Overview Dollar per Square Foot Analyses

Most Expensive Luxury Condo, Co-op & TIC Buildings
in San Francisco, by Median Dollar per Square Foot

Each of these buildings had 7 to 23 sales during the period measured.

San Francisco Luxury CONDO, CO-OP & TIC Market
by Top Neighborhoods & Districts

Each Realtor district delineated on the map above and the charts below contains a number of neighborhoods. For example, Realtor District 9 contains South Beach, SoMa, Mission Bay, Yerba Buena, Potrero Hill and the Mission (as far as luxury condo sales go). Sometimes the chart legends will mention different neighborhoods within the district, but it is always referencing the same District 9.

Top Luxury Condo Districts: Average Dollar per Square Foot Values

The highest luxury dollar per square foot values are achieved in the greater South Beach-SoMa district – almost all high-rises built within the last 20 years or so – and in the swath of much older, high-prestige neighborhoods, such as Pacific Heights and Russian Hill, running across the northern side of the city.

Top Luxury Condo Districts: Listing & Sales Volumes

The South Beach-SoMa district has by far the highest number of active luxury condo listings, and that does not include most of the new-project listings, which are typically not entered into MLS. So supply, or over-supply, is a major issue there in the market dynamic.

This next chart illustrates the abrupt plunge in sales over the past 15 months in South Beach-SoMa (tying neatly into when the Millennium problems started getting press coverage). The Pacific Heights-Marina district is now the top district for sales, followed by the Russian & Nob Hills area. Sales in the two relative “upstarts” in the luxury condo market – the Noe, Eureka and Cole Valleys district and the Hayes Valley-NoPa-Alama Square district – have been significantly growing in recent years.

Top Luxury Condo Districts: Months Supply of Inventory

South Beach-SoMa now has a very high months supply of inventory, while Pacific Heights-Marina and Noe, Eureka and Cole Valleys have very low MSI figures. Russian and Nob Hills have somewhat higher but still relatively low MSI figures in recent months. The lower the MSI, the stronger the demand as compared to the supply of listings available to purchase.

High MSI in South Beach-SoMa does not imply that luxury condos are not selling there, but it does mean that listings generally have to stand out as good values, i.e. priced correctly as well as prepared and marketed properly, to seize the attention of buyers confronted with so many options.

Top Luxury Condo Districts: Average days on Market

The same dynamic seen in months supply of inventory is replicated in the statistic average-days-on-market. Indeed, the dynamic is consistently illustrated, to a greater or lesser degree, in all the following charts.

Top Luxury Condo Districts: % of Sales Accepting Offers within 30 Days
The higher the percentage, the stronger the market.

Top Luxury Condo Districts: % of Sales Selling over List Price
The higher the percentage, the stronger the market.

Generally speaking, the higher the overbidding percentage, the more buyers are competing to win listings. However, it is also not unusual in recent years for lower priced areas to have higher overbidding percentages, and the Noe, Eureka and Cole Valleys district is distinctly less expensive than the other 3 districts illustrated on the chart below.

Top Luxury Condo Districts: Listings Taken Off Market without Selling
The higher the number, in relation to overall district
listing and sales numbers, the softer the market.

Ultra-Luxury Condo & Co-op Sales in San Francisco
The Top 2.5% of Sales, $3m+

As illustrated in the second chart below, sales at the highest end of the luxury condo and co-op market peaked in spring 2015, while the number of active MLS listings have continued to rapidly climb to peak this past June, so the supply and demand dynamics in this segment have changed considerably in the past 2+ years. This ties in with the financial market turmoil and plunge in local IPO activity that began in late summer 2015. At the same time, some of the recently built as well as upcoming condo projects are aggressively targeting this very expensive niche, adding further to supply.

This market segment targets a very small pool of very affluent buyers and it is not unusual that its statistics for months supply of inventory and average days on market to be appreciably above those in the general market. However, since spring 2015, both metrics have climbed much higher, to an average of 8.5 months of inventory and an average 55 days on market over the past year. This market has been clearly and significantly tilting to the advantage of buyers.

As seen earlier in the list of biggest sales and the chart showing the most expensive buildings, the ultra-luxury segment is totally dominated by neighborhoods such as Pacific Heights, Russian Hill, Nob Hill and South Beach-SoMa.

Please let us know if you have questions or we can be of assistance in any other way.

Our complete SF luxury real estate report (including luxury houses)
All Paragon Bay Area market reports