Who’s Right about the San Francisco Home Market?

Is It Strengthening or Declining?

Some of our readers have been understandably confused between the bad news reported elsewhere and our recent reports of a strengthening market in San Francisco. Besides the possibility of specific agendas, there are some legitimate reasons behind the apparent disconnect:

  • Much of the data reported elsewhere, such as the Case-Shiller Index, is for the San Francisco “metro area” comprised of 5 or more counties. We focus only on the city and county of San Francisco, which is its own, specific market (or actually its own specific collection of neighborhood markets).
  • Our data is typically 2 to 4 months ahead of that reported elsewhere. When the media is headlining the median sales price or Case-Shiller Index for February (reflecting accepted-offer activity in December and January), we have market data straight from MLS for April, both for closed sales and newly accepted offers (which is the most current market data available). When a market starts to heat up, as ours has in 2011, we are well ahead of the news curve.
  • Instead of comparing a single statistic, say one month’s median sales price to another’s (last month’s, last year’s, peak values in 2007/ 2008), to make a dramatic statement, we try to show the larger picture using 7 to 10 statistical measures over the longer term, in order to show trends beyond normal and relatively meaningless monthly fluctuations. (Median prices may, but actual market values don’t jump up, down, up, down significantly by month.)
  • All our data comes directly from the Multiple Listing Service and Broker Metrics, and we can provide the hard data behind all our charts.

    As illustrated below, indications continue of strong buyer demand amid a limited supply of homes for sale: as mentioned before, this typically does not result in a decline in values. In unit sales, the SF home market is up YTD about 5% over 2010 and up 7% in accepted offer activity — with an inventory of home listings that is 16% below last year’s (on April 30) and without the double homebuyer tax credit which fueled last spring’s surge.

    Whether this active real estate market will continue is unknown, but current signs are positive.

  • 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 (as happened in January and February). If market values are truly changing, the median price will consistently rise or sink over a longer term than just 2 or 3 months.
  • DAYS ON MARKET (DOM) are the number of days between a listing going on market and accepting an offer. Averages can get pulled out of whack by a few sales where the days on market were very high, and also by agents who don’t report their accepted offers in a timely manner. What’s important is the trend. The lower the average DOM, the hotter the 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 market.
  • 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 not warranted. Sales not reported to MLS are not included in this analysis. All numbers should be considered approximate.

    April Overview
    Of the SF houses and condos that sold in April, 71% accepted offers relatively quickly and averaged a sales price that was 99.6% of asking price. Many sold with multiple offers. This reflects a buyer pool jumping all over houses deemed appealing and reasonably priced. The remaining 29% that sold had 1 or more price reductions, took much longer to sell, and closed at a significant discount to original asking price. And for every 2 listings that sold, one listing expired without selling, typically due to being perceived as overpriced. Buyer demand is strong, but they’re not buying everything.

    Paragon Real Estate Group
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    Median Sales Prices for SF Houses
    This chart shows the overall house median sales price over the past 18 months (red line), the median just for distressed houses (blue), and the median just for regular, non-distressed house sales (green). Even as distressed house median price fell in the last 2 months, the median price for regular houses has increased for the past 3 (to its second highest point in 18 months). Why the plunge in January? Holiday season dynamics: the high-end market closed down in late November/ December, resulting in fewer high-end sales in early 2011. At the same time, there was a surge in distress home sales, especially as a percentage of sales. Fewer high-end sales and more low-end sales = lower median price, which then corrected as the 2011 market began. In many ways, the distress and non-distress home markets are different markets: different price points, often different neighborhoods, in different condition. Note that even as the median for regular house sales increased in April, the overall median was pulled down by the number and price point of distress sales.

    Paragon Real Estate Group
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    Median Sales Prices for SF Condos
    We see a similar situation with condo sales in the city: a declining median sales price in early 2011 mostly due to holiday season inventory and buying dynamics, mostly unrelated to values, then self corrects as the market gets back to normal.

    Paragon Real Estate Group
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    Overall SF Median Home Sales Price
    This chart looks back over the past 25 months at how the overall median sales price for SF homes (houses, condos & TICs) jogs up and down naturally without great implications for market values. The average median sales price for the entire 25 months was $688,000; in April 2011, it was $695,000; two years ago, it was $684,000. The media gets excited by monthly changes in median price, but when one steps back, one sees a remarkably stable market. And though the median fell more than usual in this past January and February, a decline is actually common for January and February (due to holiday market dynamics). The decline was a bit more dramatic this year due to an increase in low-end distress home sales. When market values really start to definitively change, either up or down, it will be reflected consistently over a longer term than just 1, 2 or 3 months.

    Paragon Real Estate Group
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    Average Dollar per Square Foot
    These charts show the average dollar per square foot for sold SF houses (top) and sold SF condos (bottom) over the past 13 months. Again, we see the average naturally jogs up and down. It’s simply that in different months, different homes sell at different prices and different dollar per square foot figures. Changes in market values will be signified by consistent changes over longer periods than 1 to 3 months.

    Paragon Real Estate Group
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    Listings Accepting Offers
    The upper chart tracks the number of SF home listings accepting offers over the past 25 months; the lower tracks the percentage of listings accepting offers (going under contract). Accepted offer activity is the most current statistic available as to the heat of the market. Last spring, the March and April market was super-charged by the double tax credit expiring on 4/30/10 (the market then crashed in May), but this spring it’s just as strong, with no tax credit, and reduced inventory. As a percentage of listings going under contract, the last 3 months are as strong or stronger as any in years. At this point, we see no signs of it declining significantly in May 2011. (Knock on wood)

    Paragon Real Estate Group
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    Homes $1,000,000 & Above
    The top chart shows half the reason why the median sales price plunged in January and February: there were simply drastically fewer high-end home sales closing (a not unusual dynamic reflecting the holiday season market). In February, per the lower chart, the number of high-end SF homes accepting offers rebounded (and has stayed high), which began to be reflected in March’s sales numbers. There is a 4 to 8 week lag between accepted offers and closed sales. Low inventory is an issue for higher-end home listings as well: it is currently 26% below last year’s inventory.

    Paragon Real Estate Group
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    Homes for Sale
    The dark red columns show the number of listings active at any time during the month; the pink columns show those active on the last day of the month. Inventory has remained low this spring, especially when compared to buyer demand. The number of active SF listings on April 30th was 16% below that one year earlier. The number of city home sales would almost certainly be higher if the inventory of homes for sale wasn’t so constrained. This has also led to a more competitive environment for motivated buyers considering appealing, well-priced homes.

    Paragon Real Estate Group
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    Months Supply of Inventory (MSI)
    (For houses and condos) High demand/low inventory means very low MSI statistics. It is as low as it has been in years, certainly since the market adjustment that occurred in September 2008. (The low April 2010 MSI reflects the frenzy to get offers accepted before the double tax credit expired on 4/30/10.) The lower the MSI, the stronger the market. Typically, under 3 months of inventory would be considered a “seller’s market.”

    Paragon Real Estate Group
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    Average Days on Market (DOM)
    One more statistic indicating a market heating up. April’s days-on-market figure for San Francisco houses and condos accepting offers is well below any for the year prior.

    Paragon Real Estate Group
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    Distress Home Sales (REO & Short Sales)
    As a percentage of sales (not shown in these charts), SF distress home sales (bank-owned and short sales) soared in January and February to their highest levels ever (24% and 26% respectively). This is another reason why the overall median sales price plunged in these months. However, in March the percentage declined to 21%, and in April still further to 18%. In the charts below, we see that the absolute number of city distress sales hit its high mark in March before dropping significantly in April. The number of active distress listings has been declining since November, but compared to regular homes, these listings take much longer to work their way from active to under contract to close of escrow. Because dealing with banks on these deals is about the most complicated and aggravating experience in real estate. (A lot of these deals fall though.)

    Paragon Real Estate Group
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    Distress House Sales by Neighborhood
    There are two types of distress sales, the bank-owned sale typically pursuant to a foreclosure (often in distressed condition) and short sales, where lender has to agree to a reduction on the mortgage owed for the sale to close (usually not in distressed condition). In the chart below, the red and dark gray portions of each column indicate the respective numbers of distress house sales and regular home sales by neighborhood. Districts 10 & 3, running across the southern boundary of the city, Bayview to Oceanview, make up 60% of all distress house sales (135 in 6 months). In all other areas, the percentage of distress house sales is much less and they have had much less impact (or even no impact) on general values.

    Paragon Real Estate Group
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    Distress Condo Sales by Neighborhood
    The red and dark gray portions reflect the numbers of distress and regular condo sales respectively. The area hit most dramatically by distress condo sales is the greater South of Market area (in District 9), where most of the big new condo developments went up in recent years. There were 98 distress condo sales there in 6 months, making up almost 50% of the city’s total. Many of the other neighborhoods with large numbers of condo sales were barely affected by bank-owned and short sales.

    Paragon Real Estate Group
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    Mortgage Rates
    As seen in this 3-month chart of 30-year mortgage rates from Bankrate.com, interest rates have been declining recently and continue to be at historically extremely low levels. This has a huge impact on the cost of home ownership.

    Paragon Real Estate Group
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