It may be covered in feces, but when it comes to San Francisco and its housing market, the bubble in this West Coast tech mecca is now approaching proportions that would make Hong Kong, Sydney and Vancouver blush, and makes the last home price peak hit in 2007 seem like child's play.
One won't see it, however, by looking at traditional home price indicators, such as the Case-Shiller Home price index which while showing a significant, double digit annual gain of just over 10%, is behind metro areas such as Seattle and Las Vegas, and substantially waters down the insanity happening every day on the streets of San Francisco.
Instead, to get a far more accurate, and granular neighborhood-by-neighborhood data for San Francisco itself, we go to Paragon Real Estate Group’s 2018 Mid-Year Market report, where what we find is sheer market lunacy and vertigo-inducing price increases that have now spiked into the stratosphere.
But first, a little history.
During the last housing bubble that blew up with such fanfare, helped take down the world financial system, left millions of real estate agents broke and homeowners underwater, and caused central banks and governments to launch the largest bail-out scheme the world has ever seen, homes in San Francisco reached what afterward were called totally crazy valuations, with the median price topping out in November 2007 at what was subsequently dubbed 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.
At that point, however, the tsunami of money that global central bankers and venture capitalists 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 soared by an unprecedented $205,000 in just the first six months of 2018, to a record $1.62 million, a 20%+ jump from a year earlier.
This increase is more than double the annual price increase reported by Case-Shiller, and the current price of $1.6 million is nearly double the last housing bubble peak of $895K.
In short: this is what a real bubble 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 of $1,620,000 as of July 3, 2018 was over $1 million higher than the median California home price, and nearly $1.4 million above the median US home price.
Like with every self-respecting asset bubble, it means that those who want to jump on board will have to pay a sizable premium to get in: as the report notes, "as houses have become the scarce resource in the SF market, overbidding percentages have gone into the stratosphere."
Paradoxically, the higher the prices, the greater the demands, and any new properties are snapped up in a record amount of time: according to Paradgon, the spring of 2018 saw new lows in average days-on-market since the 2012 recovery began, as listings have been snapped up faster than at any time in the past 7 years.
In addition to single-family houses, the bubble has also spread to condos, and in May 2018, luxury condo sales in San Francisco hit a new all time high high.
On a more granular, neighborhood-by-neighborhood basis, the differences in median home prices are enormous. In the table below, the median house prices range from $1.2 million in Bayview, one of the more "troubled" neighborhoods, to over $5.6 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.
For those on a limited budget, good luck: there are entire neighborhoods where not a single transaction below $1 million takes place.
How much bigger can this bubble get? According to the report's authors, a lot:
the heat of the San Francisco market in the first half of 2018 has been among the most blistering ever. Probably only 3 or 4 other periods over the past 50 years have seen a comparable intensity of buyer demand vis a vis the supply of listing inventory available to purchase. This despite both significant increases in interest rates and changes in federal tax law severely limiting the deductibility of mortgage interest and property tax costs. As mentioned before, the market is particularly ferocious in the lower and middle-price segments of house sales.
But the biggest wild card for the San Fran housing bubble is simple: how much longer can Silicon Valley keep the party going.
As CNBC notes, a lot of people in Silicon Valley were bracing for a slowdown in 2015 when venture investors like Bill Gurley were predicting that long-running start-ups would have to raise rounds at lower valuations because their last rounds came with restrictive conditions for future investors but they weren't ready to go public yet. Start-ups cracked down on expenses.
Apple's share price actually dropped during the year, as investors grew concerned about slowing iPhone sales and the prospect of a general downturn. The next year, Silicon Valley stalwarts Intel and Cisco both laid off several thousand employees apiece.
Indeed, it even impacted SF housing prices briefly, which actually slowed their growth in 2015 and 2016, before rocketing higher again last year.
- Softbank's $100 billion Vision Fund, which kicked off in 2017, has injected massive amounts of new money into the Valley's start-ups, with investments starting at several hundred million dollars apiece and, in some cases like Uber, buyouts for earlier investors. As Softbank floods the market with capital, traditional VCs like Sequoia have also stepped up their game with massive new funds.
- The tech IPO market is having its best year in ages, particularly for enterprise software companies that came of age during the current boom, like Dropbox (founded in 2007) and Zuora (2006).
- Local tech giants are doing better than ever. Apple, Alphabet, Facebook, Netflix, Salesforce and others continue to grow their revenues, while their share prices hit all time highs.
In other words, whatever slowdown investors were expecting to hit Silicon Valley did not happen, and the result is the current breathless lift in San Fran housing prices. How long will it continue: nobody knows, but for the answer look no further than the Fed and the world's central banks, which after a decade of easy money and liquidity injections, are set to pull the plug and begin draining global liquidity in the coming months. And if San Francisco home prices were the high beta beneficiary on the way up, it makes intuitive sense that city will be ground zero for the coming housing collapse.