In San Francisco, a boom is always associated with its essential - and subsequent counterpart - the bust. They’re as typical to the city as sun and fog. And currently, judging by the insatiable appetite of homebuyers in the city's red-hot real estate market who appear completely unfazed stock-market volatility, tax-law changes, and tech sector gyrations, the city is in one heck of a housing boom, perhaps the biggest one ever, and national indices don’t do justice to how over-the-top mind-blowing crazy the situation has gotten.
Take for example, the S&P/Case-Shiller Home price index which covers not just the city (or county) of San Francisco but includes four other Bay Area counties: Alameda, Contra Costa, Marin, and San Mateo. There are more counties in the Bay Area, but they’re not included in the index. In terms of home prices, the five-county Case-Shiller index for “San Francisco,” though showing a significant, double digit annual gain of just over 10%, waters down the insanity happening every day on the streets of San Francisco.
To get a far more accurate, and granular neighborhood-by-neighborhood data for San Francisco itself, we go to Paragon Real Estate Group’s March-April 2018 report, and what we find are vertigo-inducing price increases that have now beautifully spiked.
During the prior nationwide housing bubble that blew up with such fanfare, helped take down the world financial system, and caused central banks and governments to instigate the largest bail-out schemes the world has ever seen – from banks to entire countries – well, during that bubble, while it was still going on, homes in San Francisco reached what afterward were called totally crazy valuations, with the median price topping out in November 2007 at a mind-boggling $895,000. People were shaking their heads at the time. But after the boom came the inevitable bust. By January 2012, the median home price had plunged 31% to $615,000.
By then, however, the tsunami of money that global central bankers had unleashed was already washing over San Francisco from multiple directions: a stock-market and startup boom that the city is so dependent on, a tourist boom from around the world, wave after wave of Chinese, Russian and Petro-oligarchs desperate to park their ill-gotten cash in real estate, and of course, the veritable flood of nearly free funding. Everything came perfectly together. Then, over the course of just a little over three years, the median home price about doubled to $1,225,000, and we duly noted the unprecedented surge in prices back in the spring of 2015.
It turns out, that was just the start, because according to the latest Paragon report, the median sale price of a house in the city has since soared to a record $1.6 million in the first quarter, a 24% jump from a year earlier, and more than double the annual price increase reported by Case-Shiller. Q1 also rose above the previous high set in the fourth quarter of 2017 by $100,000.
This is what a real boom looks like.
As the report's authors observe, prices in the city have been soaring for several years, as “feverish” demand far outstrips supply. Putting the recent price explosion in context, the median home price is now 80% above the prior-bubble completely mind-boggling median price that afterwards everyone admitted had been based on totally crazy valuations. Surely, this time is be different?
When compared to either California or the US, San Francisco houses and condos are in a world of their own: the median SF house sales price in 2017 was $1,420,000 (up from $1,325,000 in 2016), and for condos, it was $1,150,000 (up from $1,095,000). Looking just at the 4th quarter, median prices were $1,500,000 for houses (up from $1,350,000 in Q4 2016) and $1,185,000 for condos (up from $1,078,000) respectively.
On a neighborhood-by-neighborhood basis, the differences in median home prices are enormous. In the table below, the median house prices range from $960,000 in Bayview, one of the more troubled neighborhoods, to over $5 million in Pacific Heights. It is in this exclusive, gorgeous, and groomed neighborhood, endowed with breathtaking views of the Bay, where you find the humble abode of the champion of the poor, former Speaker of the House Nancy Pelosi.
How much bigger can this bubble get?
As the report's authors write, "it is still very early in the year to come to definitive conclusions about where the year is going, but right now, in most market segments, buyer demand is competing ferociously for a limited supply of listings. Indeed, by some standard statistical measures of supply and demand - days on market, months supply of inventory, absorption rate - the SF market is about as heated now as it has been at any time in the past 10 years. This is especially true in the more affordable home segments, and particularly for house listings."
The situation is somewhat more complicated in the highest price ranges, especially in the luxury condo segment where supply has been rapidly increasing. Of course, whatever the property type or price segment, it all ultimately depends on the specific property, and its location, appeal, preparation, marketing and pricing, although if there is a place where the bubble will pop, it will be in the ultra luxury segment, where the supply is off the charts:
The rest of the market, however, remains incredibly tight: only about 2% of house owners are putting their homes on the market each year, which is incredibly low by historical measures - and why should they? For many owners, the house doubles as a real-estate piggy bank where funds are parked for the indefinite future. Meanwhile, about 5% of condo owners sell their homes each year, plus the new-construction condos that come on the market. This dynamic has made houses into the scarce commodity, and has fueled dramatic house price appreciation.
Looking at the charts above, one thing is clear: the dynamics of the housing market in San Francisco have put the 2005-2007 bubble to shame - what is taking place is unprecedented, much the same as parallel events in capital markets. However, just like in the stock market, so among San Francisco housing what the catalyst will be that punctures this appreciation utopia, is still very much unknown.