December 2011 – San Francisco Real Estate: A Longer-Term View

In a world where market ups and downs are blared out every minute, often with great hysteria, it’s useful to pull back and look at the home market from a wider perspective. The longer time period and larger number of sales make statistics more reliable and less confused by normal, relatively meaningless fluctuations. The longer term also provides a valuable overview for an investment typically held for 5 to 10 years and often longer.

The UCLA Anderson Home Price Forecast, which has been bearish for years, has suddenly turned bullish and is now predicting a 50% gain in California median home prices over the next 6 years. (They are not the only pundits turning optimistic.) If that turns out to be true – of course, studies have found that “pundit” forecasts are about as reliable as coin tosses – that would make 2011 somewhat analogous to 1995. In 1996, after a big market drop and then years of market-value doldrums, appreciation started to pick up again. And anyone who purchased in 1992-1995 soon looked like a genius, as values then doubled by 2000.

Generally speaking, 2011 values in San Francisco are equivalent to those in the 2004-2005 timeframe. However, it’s important to remember that different neighborhoods within the city were affected differently by the bubble popping, and are now responding differently to existing conditions.

Based on the statistics, improving economic conditions in the Bay Area, and what we’re seeing in the hurly-burly of representing home buyers and sellers, we strongly suspect that SF home prices did hit bottom in 2010-2011. Indeed, some neighborhoods, but not all, appear to have begun their recovery – it is still too early to reach definitive conclusions.


Note regarding charts below: Median and average sales prices are different statistics and their definitions follow the charts. In San Francisco with its huge variety of home types, conditions, views and locations, there is no such thing as a consistent “median” or “average” home: every statistic is a generalization based upon whatever basket of relatively unique properties happens to sell within a certain time period. Changes of a few percentage points may or may not be meaningful.

SF Houses: Median Sales Price since 1993
This chart separates out distress sales, which allows for an apples-to-apples comparison over the years. Distress houses (bank-owned and short sales) are clustered in the lower price ranges and the less affluent neighborhoods, and sell at a significant discount due to condition issues and the huge aggravation of dealing with banks. Distress sales make up 15-20% of the city’s sales, but in many neighborhoods, especially the more affluent ones, they are not a major factor and have not had a significant impact on values.

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SF Condos: Median Sales Price since 1993
While distress condo sales median prices continue to decline, non-distress condo median prices have been stable. Still, note how distress condo sales affect the overall median sales price, pulling it down by $77,000 from non-distress sales. To a large degree in SF, the distress and non-distress markets function as different markets with different buyers, locations and property conditions.

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Northern Prestige Neighborhoods House Sales
Here is the type of data table that is used to create most of the charts in our reports. The established, highly affluent, northern neighborhoods included run from Telegraph Hill in the east, across North Beach, Russian & Nob Hills, Pacific Heights-Marina, Jordan Park-Laurel Heights, Lake Street to Sea Cliff. We’ve combined these neighborhoods to get a large enough number of sales, and sales reporting square footage, to create a somewhat meaningful analysis, however there are significant differences in value between them. Note how the average size of the houses sold can fluctuate from year to year, which impacts the average sales price. For our complete Luxury Home Report: SF Luxury Homes Report

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South Beach Condo Sales
Inventory has plunged in this area, especially as new-development sales have virtually ground to a halt: Months Supply of Inventory (MSI) has been running at under 3 months of inventory, which is quite low. In 2011, we’ve seen a bounce in average sales price and average dollar per square foot. The high-tech boom is probably fueling much of the market dynamic here. For our complete SoMa/ South Beach report: SoMa/ South Beach Report

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Noe & Eureka Valleys House Sales
Average dollar per square foot has been stable for the last three years, while average sales price has climbed as average size has climbed. Note the 40% drop in the number of sales since 2003 (a drop in volume common across the city). This is a very hot market right now and in the surrounding neighborhoods: inventory is incredibly low and demand is very, very strong for appealing, well-priced homes. One recent listing received 26 offers. (It was egregiously underpriced, but the response still gives you a clue to unmet demand.) Note also how prices more than doubled between 1995 and 2000, and the drop in values from 2008 to 2009 after the financial markets crash. For our complete report: Noe/ Castro/ Haight Market Report

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Potrero Hill
This neighborhood – with its proximity to city’s high-tech/ bio-tech districts and highways south to the peninsula and Silicon Valley – has been one of the first to see the signs of a significant recovery from the market drop of 2008. Demand is very strong here. When Zynga’s IPO occurs soon, demand and values will probably go higher.

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Russian Hill
This highly sought after neighborhood never has that many listings available and many of them have spectacular views. Statistical analysis is a bit difficult here because of the variety of sales amid a relatively low number of sales, but the average dollar per square foot trend seems reasonably accurate. This is an average: some condos here sell for way over $1,000 per square foot.

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Sunset/ Parkside/ Golden Gate Heights
This large district of the city, which has a very high number of sales (400 – 600 per year), has not yet shown signs of a bounce back in values, at least not in the statistics. The neighborhoods running across the south of the city from Bayview to Oceanview, which were hardest hit by foreclosures and saw the city’s largest percentage declines in value, have not shown significant signs of recovery either.

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Pacific & Presidio Heights/ Cow Hollow/ Marina Condos
One of the interesting things seen here is that the more affluent neighborhoods saw a drop in 2002 from the popping of the dot-com bubble, while most other neighborhoods were unaffected. Changes in statistics of a couple of percentage points may not be particularly meaningful in an area such as this one with such a wide range of condos sold.

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Cole Valley; Ashbury, Clarendon & Corona Heights
This area of the city has similar dollar per square foot house values as Noe & Eureka Valleys – for 2011 YTD, it’s the exact same – but since the houses are bigger here, the average sales price is quite a bit higher. Looking at the chart, you might ask why, if both the average dollar per square foot and average size both went up in 2011, the average sales price went down. That doesn’t make sense. However, dollar per square foot and average size are based only on those homes that reported square footage – typically 60-80% of sales – while average sales price is based upon ALL sales. This is a good example why statistics should not be considered exact delineations of changes in value.

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San Francisco Months Supply of Inventory (MSI)
Inventory levels as compared to demand is as low as we’ve ever seen them and this would typically begin to put upward pressure on prices. For just houses, the hottest segment of the SF market, the MSI is under 2 months, an incredibly low reading. As of November 30th, there were over 800 fewer listings on the market than in November of 2010. Inventory is clearly not meeting buyer demand right now.

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Percentage of Listings Accepting Offers
October and November have seen very high readings on this useful statistic that integrates the level of buyer demand (as measured by listings going under contract) and the number of listings for sale. Look at the difference between November of 2011 and November 2010. For just houses, the percentage that accepted offers in this past November was over 30%, certainly the highest reading in years.

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Statistics without informed context are usually worthless, easily manipulated and often misleading.

One can only be sure market values are trending up or down if that trend is consistent over the longer term, minimally 4 to 6 months. Any definitive trend in prices and values should also be reflected in other market statistics such as average dollar per square foot, days on market, months’ supply of inventory, percentage of listings accepting offers, percentage of distress sales, and so on.

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 much greater aggravation 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.

AVERAGE SALES PRICE is calculated by adding up all the sales prices and dividing by the number of sales. It is different from median sales price, but like medians, averages can be affected by other factors besides changes in value, such as fluctuations in average unit size. Averages may also be distorted by a few sales that are abnormally high or low, especially when the number of sales is low. Average sales prices are usually higher than median sales prices.

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 above 6 months, 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. Generally speaking, about 60-80% of listings report square footage and dollar per square foot averages are calculated on these listings alone. 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.

All information herein is derived from sources deemed reliable, but may contain errors and omissions, and is subject to revision. Sales not reported to MLS are not included in this analysis.

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