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September Case-Shiller Index Released

The Case-Shiller Index for the San Francisco Metro Area covers the house markets of 5 Bay Area counties, divided into 3 price tiers, each constituting one third of unit sales. Most of the city of San Francisco’s house sales are in the “high price tier.” The Index is published 2 months after the month in question and reflects a 3-month rolling average. September’s Index was just released today, November 26th.

This first chart illustrates the price recovery of the Bay Area high-price-tier home market which really got under way in 2012. In both 2012 and 2013, home prices surged in the spring and then plateaued in the summer-autumn. The surge in prices that occurred in spring of 2013 was particularly dramatic, reflecting a frenzied market of huge buyer demand, historically low interest rates, increasing consumer confidence and extremely low inventory. In San Francisco itself, it was further exacerbated by the high-tech-fueled explosion of new wealth. The market has since calmed down somewhat and that cooling is reflected in the Index readings of the past three months (through September).

Case-Shiller Index numbers all reflect home prices as compared to the home price of January 2000, which has been designated with a value of 100. Thus, a reading of 180 signifies home prices 80% above those of January 2000.

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This second chart reflects what has occurred since 1996 showing the cycle of recession, recovery, bubble and decline/recession.

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This third chart compares the 3 different price tiers since 2000. The low-price-tier’s bubble was much more inflated by the subprime lending fiasco – an absurd 176% appreciation over 6 years – which led to a greater crash than the other two price tiers. All 3 tiers have been undergoing dramatic recoveries, but because the bubbles of the low and middle tiers were greater, their recoveries leave them well below their artificially inflated peak values of 2006. It may be a long time before the low-price-tier of houses regains its previous peak values. The high-price-tier, with a much smaller bubble, and little affected by distressed property sales, is now pretty much back to its previous peak of 2007. Many specific neighborhoods in the city of San Francisco have now surpassed previous peak values.

It’s interesting to note that despite the different scales of their bubbles, crashes and recoveries, all three price tiers now have similar overall appreciation rates when compared to year 2000: ranging from 72% for the low-tier, to 80 to 83% appreciation for the mid and high tiers, over the past 13 years. The gap is relatively small and has been converging in recent months.

Different counties, cities and neighborhoods in the Bay Area are dominated by different price tiers.

Remember that if a price drops by 50%, then it must go up by 100% to make up the loss: loss percentages and gain percentages are not created equal.

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Twitter’s Tweet not so Sweet

Technology_Boom_Breeds_Hostility_-_Slide_Show_-_NYTimes-com
Today’s NY Times front page article on the effect that San Francisco’s tech boom is having on economic diversity in SF is tough reading for those of us who earn a living in real estate. Who wants to read that a 98 year old woman is being evicted from her rent-controlled apartment or that a founder of Galeria de La Raza and his partner, who is battling cancer, are being evicted from an apartment that they’ve occupied for decades?

Continue reading “Twitter’s Tweet not so Sweet”

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Union Square Tree Lighting

The 24th annual Union Square Tree Lighting on November 22nd, 2013, featuring Macy’s gift to the City of San Francisco and most recognizable Christmas tree. The 83-foot tall, reusable tree will be dressed with 33,000 energy-efficient twinkling LED lights.

One of the prettiest features of winter and Christmas in San Francisco is the lighting – lights on buildings, on trees and in windows, which look even better as the nights get longer and colder. When the light diplays switch on (starting the week before Thanksgiving) you know it’s the onset of the holiday season.

Friday, November 22nd, 2013
Union Square, San Francisco – located between Geary, Powell, Post and Stockton Streets

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Mixed Signals from October Market

Government Shutdown & Default Fears Affect SF Homes Market

Paragon Real Estate Report, November 2013

The number of home listings accepting offers was way down in October (when it usually goes up); months-supply-of-inventory was significantly up (when it usually goes down in October); average days on market were still very low; median sales price was generally stable: The San Francisco real estate market is currently delivering a wide variety of signals, some of them undoubtedly influenced by the U.S. government shutdown fiasco, which dominated the first 3 weeks of last month.

1Percentage of Listings Accepting Offers
October is usually one of the busiest months of the year for buyers purchasing new homes – as measured by having their offers accepted – as they react to the surge of new listings that typically arrives after Labor Day. But the government shutdown and the threat of U.S. default hammered October’s activity as SF buyers nervously waited to see how it was going to shake out. Surveys show that the affluent were the group most concerned about a possible default – and SF is a very affluent home-buying market. In this chart, the plunge in the percentage of listings accepting offers is well illustrated; and on a unit basis, the number of homes accepting offers dropped by about 20% year over year, a big decline. Closed sales were actually up about 7%, but October closings reflect accepted offer activity in August/ September before the shutdown crisis began. It is too early to tell if there is more going on in the market besides the temporary reaction to default fears.

This chart on Months Supply of Inventory shows a similarly unusual trend for October: MSI going up from September instead of down. Though it’s well up from recent months, it’s still low by market standards.
Months Supply of Inventory

2Average Days on Market
Although many fewer listings went into contract (i.e. accepted offers) in October compared to last year, those homes that did accept offers did so, on average, very quickly. That, of course, is usually an indication of a hot market. So buyers didn’t snap up as many listings – either as a percentage of listings or in units – but the ones they did, were snapped up very quickly. Sometimes different statistics appear to indicate different trends on a short-term basis; such anomalies are almost always resolved over a longer term.

3Case-Shiller Home Price Index
The last Case-Shiller Index reading – for the 5-county “SF Metro Area” – came out in late October for the month of August, and it’s a 3-month moving average, so the Index really reflects the market 3 to 5 months ago. This chart gives an overview of long-term trends in Bay Area values for homes in the upper third of sales by price range (i.e. more expensive homes). If we looked at what was happening month by month in the Index, we’d see a gradual plateauing of price appreciation of higher-priced homes over the past few months after the furious increases of spring. Home values in the city of San Francisco itself (as opposed to the Metro Area) are now generally above the previous peak values in 2006-2008.
Paragon Case-Shiller Report

4Median Sales Price Appreciation
This chart tracks SF home median price appreciation since the market recovery began in earnest. The overall trend has been dramatically up, but median prices for the last 5 months have been relatively flat after the springtime spike. If the October slowdown in accepted offers had any effect on median prices, it won’t show up until November and December closed sales are tallied. The market has certainly shifted from the frenzy of the first half of the year, but, except for October (affected by default fears), statistical measures of supply and demand have generally continued to show a strong market by historical measures. If a significant shift is occurring in the market, it will become clearer in the statistics of upcoming months. Note that median price changes are not perfectly correlated to changes in home value, as they can be affected by issues such as seasonality and inventory.

5Mortgage Interest Rates
In good news for buyers and sellers, 30-year interest rates have been dropping and are now at their lowest since June (though still above the historic low reached earlier in the year).

 

 

 

6Home Values around the Bay Area
We just updated our Bay Area Home Value map, which provides an interesting look at comparative home prices around the bay. Remember that each median price delineated for a particular city disguises a huge variety of prices in the underlying sales. For example, in San Francisco, median house sales prices by neighborhood vary from under $500,000 to over $4,000,000. Other towns and cities will have a similarly wide range in property values underlying their overall median sales prices.
San Francisco Neighborhood Values

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Real Data SF October Newsletter: Own or Rent?

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Own or Rent? Your Home as an Investment

This month I want to bring together two recent analyses we’ve done on home ownership. The first looks at whether homes are good long-term investments. During the heart of the economic winter, in April 2010, I argued in this post that there are better investments than buying a home. Rather, the almost universal urge to own a home is about satisfying our hard-wired need for “shelter” – a cave that’s secure from marauding creatures (and humans), where we can paint our dreams on the walls without worrying about the landlord.

I still think that’s true, despite the housing recovery and the positive effect that it’s had on long-term home price appreciation. Here’s a chart direct from Freddie Mac that shows long-term national home price appreciation.

Note that this summarizes nominal and real (inflation adjusted) annual rates of growth (and decline) in the national housing market. This next chart shows what’s going on closer to home in the Bay Area market, using Case-Shiller’s high tier home value index, which tracks homes valued in the top third – currently around $800,000. There aren’t too many neighborhoods in SF where you’ll find a home selling for less than that.

The takeaway here is that nominal home prices have increased 244% since 1988 — or about 5% annually — while inflation has gone up by 97% — or a little less than 3% annually. In essence this simply confirms the common wisdom that holding real estate over the long term is a good inflation hedge because property values go up more than the rate of inflation.

But this analysis assumes that you’re buying a house for cash – which few of us are able to do. Rather, we use debt, thus “leveraging” our investment. So if we put 20% down on a home worth $1 million, any increase in the home value results in a five-fold increase in our equity. The magic of leverage!

Looked at this way, homes start looking pretty good as an investment. Based on a long-term home price growth rate of 3%, our actual equity investment would be increasing by 15% annually assuming we’ve put 20% down.

And this doesn’t include the additional equity building up in our home as we pay down the debt, not to mention all the psychological benefits of being able to draw pictures of mastodons on your home’s walls. For a complete discussion of homes as an investment, take a look at our Chief Economic Guru’s article, posted here.

The inevitable corollary to this analysis is whether it’s better (read cheaper) to rent or buy your home. There are a lot of rent vs buy calculators out there. It’s important to be clear about what each of them is comparing. This one, by the New York Times is one of my favorites. (Be sure you go into the advanced settings to input things like your tax rate and expected annual home appreciation.) It essentially compares your total after tax cash outlay on renting vs. buying and determines when you “break even.” That is, when the total cash outlay on buying is less than that on paying rent every month.

This one, available at Paragon’s website, focuses on investment returns though you can also use it to calculate a cash outlay break even point. (Note – Mac-users may have difficulty with the Java applet the site uses.)

Say you decide to rent. You dump the money you could use for a down-payment on a house into the stock market or bonds instead and get a return on that investment. Now compare that to how that same amount of money would grow if you invested it in a house. We used the Paragon calculator to do a rent vs buy comparison on a typical 3 bedroom home in SF. We assumed the home would rent at $4,500 per month and would sell at $1,050,000. We also assumed a 20% down-payment, a loan at 4.5% and 4% annual price appreciation (1% less than the long-term rate we discussed above). Here’s a screenshot of the result:

Conclusion: Viewed an investment, you’d be better off buying a house after 1.5 years than sticking your cash for the down payment in an investment yielding 2.5%.

Now, my main quibble with this analysis is that 2.5% seems too low a return on an investment alternative to home ownership. But even if you increase the return to, say, 7% — more in line with a safe stock portfolio – a home is still a better investment after 1.9 years. Such is the magic of leverage!

As always, comments, criticisms, and kudos always appreciated!

Misha