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Tiny, Affordable Apartments Going Up in The Tenderloin

Tiny as a meme for how-to-live-in—as in tiny house—is catching fire in the city apartment living tableau in American cities where affordable housing is a chronic situation. Now in SF’s Tenderloin neighborhood, developer Forge Land Co. is at the permitting stage for building tiny 250-square-feet to 440-square-feet apartments at two different locations: 145 Leavenworth St. and 361 Turk St.

Construction on the two projects is expected to start by the end of 2018, with a total price tag of $63 million. That translates to $230,000 up to $336,000 per unit in build cost, including using modular systems and off-site construction of the steel frames used in the construction. The modular approach and off-site fabrication saves money, which makes the apartments affordable in a city where the median home now costs $1.6 million. But San Francisco unions are fighting modularity as those jobs are not done by San Francisco trades people. Forge is using all union workers on their Tenderloin projects and so far are not facing union opposition.

Affordability & the Cost of Housing in the SF Bay Area

The California Association of Realtors recently released its Housing Affordability Index (HAI) for the 1st quarter of 2018, which measures the percentage of households that can afford to buy the median priced single family dwelling (house).

In this analysis, affordability is affected by 3 major factors: county median house price, mortgage interest rates, and the distribution of household incomes within the county. (Housing Affordability Index Methodology). The HAI uses house prices exclusively and if condos were included in the calculation, median home prices would decline, affordability would increase and income requirements and PITI costs would be reduced as well. (SF now has more condo sales than house sales, but that is not the case in other Bay Area counties.)

If the HAI Index incorporates changes to the federal tax code (effective 1/1/18) limiting the deductibility of interest expenses and property taxes, it will presumably have a negative effect on affordability percentages in 2018. However, as of Q1 2018, the CAR Index has not yet been able to adjust their calculations for these changes.

By definition, half the homes sold in any given county were at prices below the median sales price, i.e. there were numerous homes that were more affordable than the median prices used in this analysis. However, any way one slices it, the Bay Area has one of the most expensive – if not the most expensive – and least affordable housing markets in the country. That impacts our society and economy in a number of important ways.

Since the real significance of many of these charts is in the longer term trends, we’ve only updated some of the charts below in this report with Q1 2018 data: Q1 median home prices, income required to purchase a median priced house, PITI costs, and county affordability percentages.

Link to our Survey of Bay Area County Markets, Trends & Demographics
Positive & Negative Factors in SF Bay Area Real Estate
Link to our Main Reports Page

Long-term Bay Area Housing Affordability Trends

Affordability Percentage by Bay Area County

Note that extremely low affordability readings converged across Bay Area counties at the top of the bubble in 2006-2007. So far, there has not been a similar convergence in our current market, though affordability is generally dropping as prices increase.

Having dropped approximately 40% from 2007 to mid-2016, extremely low interest rates have subsidized increasing home prices to a large degree in recent years – but they’ve begun to rise significantly in 2018.

San Francisco is still above its all-time affordability low of 8%, last reached in Q3 2007 (even though its median house price has increased more than 50% during that period). Other Bay Area counties (except for Silicon Valley) have appreciably higher affordability percentages, for the time being. Generally speaking, as one moves farther away from the heart of the high-tech boom, San Francisco and Silicon Valley, affordability increases.

Monthly Ownership Cost at Median Sales Price

Minimum Qualifying Income to Buy Median Priced House
Assumes 20% down payment and including principal, interest,
property tax and insurance costs.

Bay Area Median House Prices

San Francisco-Only Median House Price Appreciation
by Quarter since 2012

Before the high-tech boom, Marin, a famously affluent county for long time, had the highest median house price. But the high-tech boom accelerated median home prices in San Francisco and San Mateo faster and higher.

Additional chart: Median condo sales prices by county

San Francisco has a much larger and more expensive condo market than other local counties, and is the only county with a very substantial luxury condo market – one that is growing significantly with recent new-condo project construction.

U.S. Metro Area Housing Affordability
by the National Association of Realtors

This national affordability chart above employs a different methodology than the CA county charts above: The graphed chart values (percentages) have totally different meanings. The two metro areas at the bottom of the rankings make up 7 counties around the Bay Area.

Mortgage Interest Rates since 1981

Short-Term Changes in Mortgage Interest Rates

Interest rates play an enormous role in affordability via ongoing monthly housing costs, and interest rates, after their recent post-election jump are about 35% lower than in 2007. To a large degree this has subsidized the increase in home prices for many home buyers. It is famously difficult to predict interest rate movements, though there is general agreement. Any substantial increase in interest rates would severely negatively impact already low housing affordability rates.

Income, Affluence & Poverty

Santa Clara, San Mateo and Marin Counties have the highest median household (HH) income in the Bay Area. Though the median HH income figures of these 3 counties are almost double the national figure, their median house prices are 4 to 5 times higher, an indication that income dollars can go a lot farther in other parts of the country than they do here. Indeed an income that in other places puts you close to the top of the local register of affluence, living grandly in a 6-bedroom mansion, in the Bay Area might qualify you as perhaps slightly-upper-middle class, living in an attractive but unostentatious, moderate-sized home that costs twice what the mansion did (though, this being the Bay Area, you are probably still driving a very expensive car).

On the other hand, you live in one of the most beautiful, highly educated, culturally rich, economically dynamic, and open-minded metropolitan areas in the world.

Behind median HH incomes, each county also has enclaves of both extreme wealth and poverty within its borders.

Very generally speaking, in the Bay Area counties, renters typically have a median household income about half that of homeowners. In San Francisco, where the majority of residents are in tenant households, that significantly reduces the overall median HH income figure. The picture of housing affordability for renters in the city is ameliorated or complicated by its strong rent control laws (which, however, don’t impact extremely high market rents for someone newly renting an apartment) .

Additional chart: Homeownership Rates by County

Additional chart: Population Demographics – Children & Residents Living Alone

San Francisco has the lowest percentage of residents under 18 of any major city in the U.S. (It is famously said that there are more dogs in the city than there are children.) It also has an extremely high percentage of residents who live in single-person households – 39% – which is a further factor depressing median household income below markets with similar housing costs.

The Bay Area has approximately 2.8 million households. Of those, approximately 124,000 households have incomes of $500,000 and above, which would generally be considered to place them in the top 1% in the country by annual income. At 7.5%, Marin has the highest percentage of top 1% households, followed by San Mateo at 6.2%. With approximately 38,000 top 1% households, Santa Clara, the Bay Area’s most populous county, has by far the largest number of these very affluent households, while San Francisco has about 22,000.

It should be noted that besides high incomes per se, another factor in the Bay Area housing boom of recent years has been the stupendous generation of trillions of dollars in brand new wealth from soaring high-tech stock market values, stock options and IPOs. Thousands of sudden new millionaires, as well as many more who didn’t quite hit that level, supercharged real estate markets (especially those in the heart of the high-tech boom) as these newly affluent residents looked to buy their first homes, perhaps with all cash, or upgrade from existing ones. That is something not seen in most other areas of the country, certainly not to the degree experienced locally, and is a dynamic outside typical affordability calculations. This increase in new wealth has slowed or even declined in the past 12 months as the high-tech boom has cooled (temporarily or not, as time will tell). Still, there are dozens of local private companies, usually start-ups, some of them very large – such as Uber, Airbnb and Palantir – which are considered to be in the possible-IPO pipeline. If the IPO climate improves and successful IPOs follow, a new surge of newly affluent home buyers may follow.

Additional chart: Bay Area Populations by County

A look at two very different income segments in the Bay Area, those households making less than $35,000 and those making more than $200,000. The $35,000 threshold is not an ironclad definition of poverty, especially since housing costs (by area, and whether market rate, subsidized or rent-controlled), household sizes and personal circumstances vary widely, though it is clearly difficult for most area families trying to live on that income. At over 25%, San Francisco has the highest percentage of households with incomes under $35,000 and, at 22%, Marin has the highest percentage making $200,000 and above.

Amid all the staggering affluence in the Bay Area, and huge amounts of new wealth generated by our recent high-tech boom, very significant percentages of the population still live in poverty, especially if our extremely high housing costs are factored into the calculation. (The above chart calculates poverty rates by different criteria, the higher one factoring in local costs of living.) The economic boom has helped them if it resulted in new, better paying jobs, unfortunately not as common a phenomenon as one would wish for the least affluent. It hurt them, sometimes harshly, if their housing costs escalated with the increase in market rates.

Longer-Term Trends in Prices and Rents
The same economic and demographic forces have been putting
pressure on both home prices and apartment rents.
 

Bay Area Median House Prices since 1990

If one looks at charts graphing affordability percentages, home prices, market rents, hiring/employment trends and to some degree even stock market trends, one sees how often major economic indicators move up or down in parallel.

Monthly Rental Housing Costs

The recent economic boom has added approximately 600,000 new jobs in the Bay Area over the past 6 years, with about 100,000 in San Francisco alone – with a corresponding surge in county populations. Most new arrivals look to rent before considering the possibility of buying. The affordability challenges for renters (unless ameliorated by rent control or subsidized rates) has probably been even greater than that for buyers, since renters don’t benefit from any significant tax benefits, from the extremely low, long-term interest rates, or by home-price appreciation trends increasing the value of their homes (and their net worth). In fact, housing-price appreciation usually only increases rents without any corresponding financial advantage to the tenant. Rents in the city have been plateauing in recent quarters and may even be beginning to decline as the hiring frenzy has slowed and an influx of new apartment buildings have come onto the market – but they are still the highest in the country.

Bay Area Rent Report

Affordable Housing Stock & Construction in San Francisco

Additional Chart: Affordable Housing Construction Trends in San Francisco

There may be no bigger political and social issue in San Francisco right now than the supply (or lack) of affordable housing: Battles are being fought, continuously and furiously, in the Board of Supervisors, at the ballot box and the Planning Department by a wide variety of highly-committed interests, from tenants’ rights and neighborhood groups to anti-growth factions and developers (to name a few). It is an extremely complicated and difficult-to-resolve issue, especially exacerbated by nimby-ism and the high cost of construction in the city. SPUR, a local non-profit dedicated to Bay Area civic planning policy, estimated in 2014 that the cost to build an 800 square foot, below-market-rate unit in a 100-unit project in San Francisco was $469,800 – and we have seen higher estimates as well.

This fascinating graphic above, based on SF Controller’s Office estimates from late 2013, breaks down SF housing supply by rental and ownership units, and further divides rental by those under rent control. All the units labeled supportive, deed restricted and public housing could be considered affordable housing to one degree or another, i.e. by their fundamental nature their residents are not paying and will never pay market-rate housing costs. (Units under rent control will typically go to market rate upon vacancy and re-rental, though rent increases will then be limited going forward.) Adjusted for recent construction, there are roughly 34,500 of these units out of the city total of about 382,500, or a little over 9% of housing stock. Section 8 subsidized housing would add another 9,000 units.

There are currently many thousands of affordable housing units, of all kinds, somewhere in the long-term SF Planning Department pipeline of new construction, though many of them are in giant projects like Treasure Island and Candlestick Park/Hunter’s Point, which may be decades in the building. But it is generally agreed that new supply will never come close to meeting the massive demand for affordable housing, further complicated by the question of what exactly affordable means in a city with a median home price 5 times the national median, typically well beyond the means of people such as teachers and members of the police force. One corollary of increasing affordable housing contribution requirements for developers and extremely high building costs is that developers are concentrating on building very expensive market-rate units – luxury and ultra-luxury condos and apartments – to make up the difference.

Other reports you might find interesting:

Survey of SF Bay Area Real Estate Markets

10 Factors behind the San Francisco Real Estate Market

30+ Years of San Francisco Bay Area Real Estate Cycles

San Francisco Neighborhood Affordability

All our analyses can be found here: Paragon Market Reports

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. All numbers should be considered general estimates and approximations.

© 2018 Paragon Real Estate Group
 

Street Artist Honeys Up Side of Building in SoMa

Maybe you’ve already heard of him, the anonymous SF street artist who goes by the nom du plume of fnnch, pronounced as “finch.” If so, his latest paint-and-brush project at 1263 Mission Street in SoMa won’t surprise you. Honey bears. Not the cute cuddlies kept on a window sill or in a cabinet for a sweet pour on toast or hot biscuits. These honey bears are roadside billboard big, and there are three of them. Fnnch has a rep in San Francisco for a street artist protest in SoMa by putting up in one night 450 honey bear images on public spaces this past January.

His purpose: to protest the city’s criminalization crackdown on certain types of street art. Back in January, fnnch said in a press release, “Our residents want to express themselves. Visitors come here for their art. And yet the city criminalizes certain forms of street art.” Other cities are not so harsh as SF in this regard.

The three bears going up on a Mission building side are the biggest work from fnnch—the building itself is the HQ for Clever, an education startup, and the Clever CEO scrambled up on the scaffold to give a helping hand on the sweet bears.

Kaiser Permanente Puts Up $200M to Fight Homelessness

Homelessness in San Francisco remains an escalating society challenge and even worry among San Franciscans. In certain street areas homeless people and conditions are making a bad rep for the city among potential retail store and business investors. Small efforts to address homelessness include portable shower and bathroom facilities or even small-size housing, ala Japan. Now, Kaiser Permanente, is entering the solutions mix by pledging $200 million to work with SF homelessness and affordable housing. It is among the largest financial investments from a private company. 

The exact programs the money will support are not defined yet. The fund is called Thriving Communities Fund, and follows a philosophy of putting money in for social impact, with the anticipation of some kind of financial return on the investment.

Kaiser Permanente Chief Community Health Officer Bechara Choucair says the non-profit’s mission is to create thriving health for its members that “goes beyond the four walls of the hospital into what happens in the community.”

San Francisco Luxury House, Luxury Condo, Co-op and TIC Markets

As seen in the chart below, so far in 2018, SF luxury home sales have been very strong, higher than in any previous year since the recovery began in 2012. The recent stock market volatility notwithstanding, the economic confidence that has been sweeping the nation is also showing up in our luxury home markets. For example, as of February 16th, the sales of condos, co-ops and TICs at prices of $2m and above has jumped 55% in the city, year over year, and luxury houses by 19%. Note that year-to-date data is very preliminary and much more will be known once the spring selling season really gets started in earnest. Also, if the recent financial market volatility continues and becomes even more dramatic, that may cool high-end home markets (and IPO activity) as it has in the past.

Longer-term sales volume charts – which also show a substantial bounce in sales in calendar year 2017 – are a bit further down in this report in the “Overview: Listing & Sales Volume” sections.

However behind the positive sales statistics, inventory statistics provide a note of caution, especially for what we call the ultra-luxury home segments: houses selling for $5m+ and condos and co-ops selling for $3m+. In those segments, the supply of listings has been surging well beyond demand, and many of these listings are expiring without selling. As an example, ultra-luxury home sales make up about 2.5% of total sales, but as of February 23rd, they made up 12% of active SF home listings (no offer accepted). It appears some sellers are getting a bit over-exuberant regarding the value of their beautiful homes. This is illustrated in the 2 charts below.

Just because a luxury market segment is notated as being in buyer-advantage market territory does not mean that some listings do not sell very quickly for well over asking price, as some certainly do. Ultimately in real estate, it all depends on the specific property, and its appeal, preparation, marketing and pricing.

It can be challenging to measure appreciation in the most expensive price segments, because, firstly, there are not that many sales, and secondly, because of the huge range of sales prices with those segments ($3m to $30m for luxury houses in SF; $2m to $22m for condos and co-ops), but it may well be that their values have generally plateaued since 2015, or in some instances, ticked down a little. But it all depends on the property, and different neighborhoods are often experiencing very different market conditions in the city, some much stronger than others – especially in the luxury homes segments.

How the 2018 market plays out depends on a number of factors that are susceptible to change: financial markets, interest rates, the course of the high-tech boom, whether our big, local start-ups proceed with IPOs, political developments, and so on. . (Positive & Negative Factors in Bay Area Markets) For the time being, the San Francisco market appears to be off to a heated start characterized by robust demand. Here at Paragon, our 2018 SF sales volume in January and February was up 38% year over year, though admittedly we are outperforming the general market, which is up about 8%.

Most analyses below are based on 6-month or 12-month rolling figures as those typically provide a better illustration of the general direction of market trends (using larger data sets), as opposed to common monthly fluctuations (based on very small data sets). Each data point is these cases reflects the average or median statistic for the 6 or 12 month period.

Overview: Luxury Home Listing & Sales Volumes
All houses priced $3m+; All condos, co-ops, TICs priced $2m+

Active Listings on Market since 2005

Sales Volumes since 2005

Overview: Ultra-Luxury Listings & Sales Volumes
Houses priced $5m+; Condos, co-ops, TICs priced $3m+

Active Listings on Market since 2005

Sales Volumes since 2005

The charts above illustrate overall listing and sales volume trends for 1) in the top 2 charts, the entire luxury home market, and then, 2) in the bottom 2 charts, specifically for the more costly ultra-luxury segment. There are some significant differences between the luxury condo and house markets, but, generally speaking, luxury home sales soared since the recovery began in 2012, cooled a bit in late 2015 (financial market volatility, as well as jump in new-luxury-condo construction), and then bounced back in late 2016 and 2017. The inventory of active listings on the market has risen considerably in the past 2 years, which has appreciably altered supply and demand dynamics. As a point of comparison, in the more affordable home segments (especially for houses), supply has not risen, and indeed has declined in some areas, and inventory is still very inadequate when compared to the heated demand.

Further down in this report, we deconstruct the luxury markets further by property type, price segment (expensive vs. very expensive) and by neighborhood, and that is where some interesting and sometimes dramatically diverging trends come to light.

In this analysis, charts will sometimes use different price thresholds for the luxury designation, depending on when the chart was first created, or whether different property types are being mixed together. Right now, we consider that luxury condos, co-ops & TICs start at about $2m, and luxury houses at $3m – that is roughly the top 10% of their markets. What we call ultra-luxury adds another $1m to condo sales prices, and another $2m to houses, and constitutes about the top 2.5%.

San Francisco Luxury House Sales
by Era of Construction

The great majority of SF luxury houses sold in 2017 were built
prior to 1940. More than half were built before 1920.

Luxury Condo, Co-op & TIC Sales
by Era of Construction

The largest group of luxury sales of these property types
were condos built since 2000, many of which were newly built.

Other Paragon reports you might find interesting:

San Francisco Neighborhood Affordability
Positive & Negative Factors in Bay Area Markets
Survey of Bay Area Real Estate Markets
San Francisco & Bay Area Demographics
Paragon Main Real Estate Reports Page

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.

© 2018 Paragon Real Estate Group

2-Day Carnaval in Mission District Blasts Off This Weekend

San Francisco has its own Carnaval street celebration—not quite the size of New Orleans, but still a cultural/social/cuisine blast. Our Carnaval has been dancing and eating and music-playing its way through the Mission District for 40 years now, and it’s set to take off this upcoming weekend. Make plans to zip over to Harrison Street from 16th to 24th Street, between 10am and 6pm. Great music, costumes, dancing, food and cultural extravaganza stuff including appreciation of the Mission District’s glorious history.

Our SF Carnaval started in 1979 by an inspired group of artists and was first held in Precita Park, then moved to Dolores Park and now occupies the hub of Mission, spanning eight blocks between 16th and 24th.

The culminating grand parade starts of 9:30am on Sunday at 24th and Bryant Streets, snakes down to 24th and Mission Street, the heads north to 17th Street and South Van Ness.

SF Cultural Enclaves Moving Toward Heritage Preservation

The district of Bayview in San Francisco is a neighborhood of working class housing, retail shops and small hometown restaurants. It used to be a place of grittiness and patches of poverty. But like the Mission district that has undergone extensive gentrification, Bayview is starting to be bought up and built out upscale. According to a story in the SF Chronicle, that has residents like April Spears worried. She owns a soul food restaurant, likes the slow improvements coming to Bayview, but is anxious that upscale condo towers being built in Bayview now will drive out the current residents—including its African American heritage population.

San Francisco has a loose set of guidelines that define a cultural district, but thanks to people like Spears and others in Bayview, the idea and protections of a cultural district are becoming more solidified. Last week the Board of Supervisors passed a bill that will establish a formal process for creating protected cultural districts in the city. The bill also envisions city funding for the districts preservation efforts.

Another district pushing for these protections is the Castro.

Wow – Need $333K a Year to Buy a Home in San Francisco

It’s an easy number to remember: $333,000. So, if you’re talking at a party or around the cooler, you can make a weighty dialectical point by stating, “Buying a home in San Francisco—house, or condo—you or you and your significant other need to be hauling in $333,000 a year.” And everybody will be impressed or maybe dismayed.

The California Association of Realtors released its Quarterly Housing Affordability report a couple of days ago, and said report found the $333K annual income figure for SFers, and that’s without the taxes.

That fits with the upwelling median price of an SF home sitting now at $1.61 million. Another point to keep for the water cooler is these are asking prices, not the final sales price—and many houses or condos are going higher than the asking price. The $333K price tag has shot up in one year, since the 2017 SF figure of $267,130 needed in the income piggy bank per year.

Amazon Cashier-Free Grocery Stores Coming to SF and Chicago

Well, it’s a dubious honor, and another first for San Francisco, city of cultural experimentation ever since the Barbary Coast days. Amazon, with its love-hate relationship with consumers, is coming to an SF corner as a brick-and-mortar grocery store. The twist; it won’t have any cashiers to check you out. No humans except us shoppers cruising the aisles, putting stuff in our carts or baskets. And cameras watching us and recording every move and eyebrow lift.

That’s right. It’s called Amazon Go, and the store tracks with it’s Big Brotherish camera array all of our shopping activities and bills us after we’ve left the store. Critics worry that this technology will lead to armies of cashiers being out of jobs.

Amazon posted ads today for store managers for the SF and Chicago stores. It isn’t known where the Amazon Go will be situated, but SF Chronicle reports that Amazon recently purchased space in Union Square.