San Francisco Home Prices Remain High, affordability index stays low

What an interesting Summer! We are still in the midst of a hot real estate market where homes are getting quickly snatched up, buyers are stretching to pay over asking. The recent stock market gyration and Chinese currency devaluation add some uncertainty to the economy, and later this month the Fed is going to tell us where interest rates might go, but the San Francisco real estate market is steaming along.

The Housing Affordability Index (HAI), an index released periodically by the California Association of Realtors to measure the percentage of households that can afford to buy the median priced single family dwelling, shows all Bay Area counties saw declines in their affordability index reading, and San Francisco is now only 2 percentage points above its all-time low of 8%, last reached in Q3 2007.

The median house price, mortgage interest rates, and household income are the 3 major factors affecting the Housing Affordability Index. A picture is worth a thousand words, so here are the graphs:

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Interest rates play a huge role in affordability, and it is certainly reasonable to be concerned that affordability percentages are now hitting such depths while interest rates are also close to historic lows. For example, in 2007, when affordability percentages hit previous low points, prevailing mortgage interest rates were approximately 50% higher than today’s. When interest rates start to rise – when and how much being the real questions – there will be potentially dramatic effects on affordability, which could presumably affect demand and prices.

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As the HAI is approaching the record low, don’t hit the panic button yet. I’d like to show a unique perspective from John H Dolan, the sole market maker for the Case Shiller home price futures contracts that are traded (very infrequently) on the Chicago Mercantile Exchange.

San Francisco home prices have been rising sharply but how much higher might they run? Are they in a bubble? When, and how, will we know? Homeowners want to stay on top of expectations, while potential home buyers don’t want to see the market run away from them. While there may be many opinions, there is also one public market that home owners and buyers can access, to see what the market “thinks”.

The CME (Chicago Mercantile Exchange) has listed futures contracts for a number of the Case Shiller indices, including San Francisco (SFR), since 2006.^1 Essentially, the contracts allow participants to either view, or place a bet, on where the Case Shiller SFR index will be at various points over the next few years.^2 Since these housing contracts cash-settle on the value of the index in the settlement month (much like the S&P 500) it has been argued that traders may be “betting” on where they expect the index to be.^3 People can freely view the contract prices as a component of their own home price forecasts.^4

The graph below shows both the historical Case Shiller SFR index (in black), bids (blue axis), offers (red pluses), and contract closes (in purple). Finally contract values for Dec ’14 are shown in red.

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There are sets of 11 contracts (one for the Case Shiller 10-city index, and one for each of the ten components. San Francisco (SFR) is one of those ten.) While index levels react more slowly, and are backward looking, contract prices can change daily. While forward prices have been rising over the last few years on better-than-“expected” home price gains (at least as expected by this market), contract prices (particularly longer-dated expirations) have fallen this month.

While the SFR home price index has nearly doubled over the last five years (from a low of 117.42 in May 2009 to 214.53 this month), forward market prices are consistent with much more muted gains in 2016 and 2017. For example the 225.0 bid and 229.0 offer on the Nov ’16 contract are 4.9% and 6.7% above today’s level. The Nov ’17 contract is priced for an additional 4.3% gain the following year.

As such, expect headlines to note the slowdown in SFR home price appreciation (HPA) over the next year.

While contract prices for Nov ’16 and ’17 are higher than where they were at Dec ’14, they are off 4-5 points in the last few weeks as news of the Yuan devaluation and stock market gyrations have dampened expectations. The recent decline in prices is indicative that futures contracts are not predicators of the future, but reflective of expectations (that change as news occurs). That is, just as prices for oil futures dropped $50 in the last year as expectations changed, home price futures contracts also move.

In addition to just viewing bids and offers, those that either want to hedge an exposure (or future purchase), or who have a strongly different view of forward index levels can trade contracts to lock in forward prices. For example, someone thinking that SFR index levels will be lower by Nov 2016 might look at selling Nov ’16 contracts, while someone expecting another 10% annual gain might prefer to buy contracts.

Contracts have notional value of $250 * index price, so at a price of 225.0, the notional value is $56,250. A one point move in the futures price (e.g. from 225 to 226) is worth $250.

A trader would have to have a futures account, but the CME would be the legal counterparty to any trade. Margins tend to be less than 10% of the notional value.

As such, someone with a more bullish outlook in 2014, or someone looking to buy a house in 2015/16, could have (hypothetically) bought Nov ’16 SFR futures near 198 (mid-market price that day). With the contract 225 bid today, the buyer wouldíve made $6,750/contract

The contracts have been extremely thinly traded (e.g. there was only one SFR contract traded last month) so caution and patience are important. The markets are often quoted 1×1 (one contract bid/ one contract offered) so market orders for more than one contract are discouraged. The market-maker has expressed willingness to trade larger size, so best to contact him for larger orders.

Finally, contracts are traded on the SFR index which covers a wide area. Prices in any one neighborhood might diverge from the overall index levels. In addition, there’s (of course) no hedge for over-paying for a house.

Net, CME Case Shiller home price futures offer a useful tool for forecasters in framing their housing outlook. Unlike surveys, prices are continually updated, and traders are putting their money behind their bids and offers. The current thinness (limited trading) of the market suggests that CME prices might be one tool (but not the only) that homeowners can use to see what the market “thinks” about where home prices are headed.

1-For those new to home price indices, the Case Shiller index is the grand-daddy of home price indices. The indices were originally introduced in the early 1990’s by Nobel Laureate Robert Shiller and Carl Casein, and remain one the oldest that are currently being used. CS indices are often cited in news reports and in the financial press (e.g. CNBC). The CME has contracts for the Case-Shiller 10-city index (CUS) and, in addition to SFR, each of the other 9 components: (BOS, CHI, DEN, LAV, LAX, MIA, NYM,SDG, and WDC).

2- There are 11 expirations that today range from Nov 2015 to Nov 2019 (although some contracts do not often have posted prices).

3- Case Shiller indices are released on the last Tuesday of every month

4- e.g. Bloomberg

Big thanks to John H Dolan for the information, and new point of view! Visit HomePriceFutures.com for more analysis on home price derivatives.

That’s it. My head is spinning.

Feb 2015 SF New Condominium Prices Up 19% YOY

FEBRUARY 2015 SAN FRANCISCO NEW CONDOMINIUM PRICES RISE 4 PERCENT FROM PREVIOUS MONTH, UP 19 PERCENT OVER A YEAR AGO

San Francisco – March 10, 2015 – San Francisco new condominium prices rose 4 percent in February 2015 from the previous month, according to the Condominium Pricing Index just released by The Mark Company, a leading urban residential marketing and sales firm. Scroll to the bottom to see the trend sheet.

The Mark Company Condominium Pricing Index for February was $1,221 per square foot, which is 19 percent higher than the previous year and four percent higher than the previous month. Tied with October 2014, this four percent increase is the highest monthly increase since April 2014.

New construction inventory was down 7 percent from last month, but 1,715 percent higher than a year ago. “Despite the addition of more than 1,600 units in 2014, there are now a total of 708 new condominium units available for sale in San Francisco,” said Erin Kennelly, senior director of research, The Mark Company.

The Condominium Pricing Index, part of the firm’s monthly Trend Sheet, represents the price per square foot of a new 10th floor, 1,000-square-foot condominium. It is based on recent sales data, and uses a proprietary quantitative method to measure trends in market demand. It tracks the value of a new construction condominium without the volatility of inventory changes.

The Mark Company Penthouse Pricing Index, which applies the same methodology to a new 30th floor, 2,000-square-foot condominium, was $2,097 per square foot in February, up 4 percent from the previous month and 19 percent higher year over year.

The average price per square foot for resale condominiums, which is more volatile than the Condominium Pricing Index, was down 6 percent month over month, and is 3 percent higher than a year ago, according to The Mark Company.

Resale inventory remains extremely low. “There are now only 81 active resale listings, representing only 1.4 months of inventory at the current pace of sales,” noted Kennelly. Six months of inventory is considered the equilibrium between a buyer’s and a seller’s market.
The Mark Company has also released the February Downtown Los Angeles Trend Sheet and Pricing Index, as well as the Downtown Seattle Trend Sheet and Pricing Index.

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Finding The Right Property To Complement Your New Job

Moving to a new city? Very exciting, but where will you live? The questions just multiply from there: Should I buy or rent? Should I pay more to avoid a commute? Should I live with a roommate or alone?

It takes time to get the feel of a new city, and the house hunting process should not be rushed. A home is the largest asset – or liability – that most people ever have, and real estate is notoriously illiquid and difficult to divest. Besides, maybe you’ll hate your new job and want to leave after three months. Get to know the area before making any long term commitments, possibly by working with a local expert.

As the search for rental housing begins, keep your unique needs firmly in mind. If you have a pet, remember that not all landlords accept pets, and ask about pet policies first when contacting property managers. If you own a car, how available or expensive is nearby parking? If you don’t own a car, start looking at maps of the city’s public transportation and car-share services like Zipcar. Consider a neighborhood’s’ “walkability”, or how accessible by foot amenities like grocery stores, restaurants, entertainment, nightlife, shopping and other conveniences are.

If at all possible, visit the city in person to scout neighborhoods for their feel, vibe, and atmosphere. Do you want a hip urban neighborhood brimming with coffee shops, craft beer-lined bars, and vinyl record stores? Maybe you’ve just graduated college and want to live among preppy young professionals, or maybe your children have just graduated college and you want a quieter neighborhood rife with art galleries and upscale restaurants.

Whatever you’re after, research is key and seeing the city for yourself is the best way to make sure you’re getting exactly what you want. Of course, what you want from a home isn’t the only conern – your commute is going to play a big part as well.

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Image source: Hobvias sudoneighm

I’m not a big fan of math, but a brief home economics lesson is in order when evaluating commutes. In 2014, the IRS allotted 56 cents per mile as the cost of driving an owned vehicle (this figure includes gas, depreciation and maintenance, but not the cost of buying or insuring a car).

Subtracting out the 10 federal holidays, there are 250 work days in a calendar year. If you live 15 miles from your job, that comes to 30 x $.56 = $16.80 per day in commuting costs, or $4,200/year. That annual $4,200 cost does not account for the rush hour traffic stress, the lost time with your family and friends, the environmental impact of emissions or the generally lower quality of life associated with commuting.

Consider living closer to work (in the city), and better yet walking or biking to save those headaches and dollars.

While we’re talking math, let’s address an elephant in the room: what you can afford. All neighborhoods, cities, and even states are not created equal on rents, or housing prices, so in your scouting remember your means. The Department of Housing and Urban Development (HUD) considers anyone spending more than 30% of their before-tax income on housing costs to be cost burdened, and most personal finance experts agree that 30% is a prudent cap on housing costs. If you have your heart set on that trendy neighborhood with all the organic vegan restaurants, but your rent accounts for 50% of your income, there is another option: living with others.

If you’re moving alone, roommates offer obvious financial savings on rent, but the benefits don’t stop there. The shared home will likely be partially furnished already, saving money on both furniture and moving costs. Utility accounts are likely already set up, and monthly utility bills will be split rather than all falling on you. Roommates can also be a lot of fun, if chosen wisely. Remember you’re moving to a new city where you don’t know many people if any at all, and roommates can come all-inclusive with a social life, local expertise and even a few jokes you’ve never heard.

There’s another oft-overlooked advantage to moving in with an established roommate: more flexible leasing terms. Whether you sign a sublease agreement with the roommate or sign a new rental agreement with the landlord/manager, there is a better chance you can negotiate for a month-to-month lease or a shorter lease term (e.g. six months instead of a full year).

This flexibility allows for unforeseen hiccups like the job being a bad fit, or disliking the neighborhood, or wanting to buy your own place after getting to know the city better. Either way, it’s always better to see the property, walk around the neighborhood both at day and night, and meet any potential roommates in person before signing a rental contract.

Moving to a new city can be intimidating, but the antidote to fear is knowledge. Research the city and its neighborhoods online, look up recent home sales by neighborhood, rents, crime, and cultural hotspots. Visit in person if at all possible before choosing a home and neighborhood, contact that friend you haven’t talked to in five years who lives there, and check Craigslist homes for rent and shared housing offered by roommates.

Most of all make it fun: start a list of all the restaurants you want to try, the neighborhoods you want to visit, and the irresistibly kitschy things you want to do. The transplant experience can either be scary or exciting, the choice is yours.

[This article was written by Ella Jameson. Learn more about Ella @JamesonElla. If you have something you want to share with our readers, just give us a shout.
Featured Image source: Michelle O’Riordan]

Ask: I Want To Rent A Home Built On “Those Stilt Kind Of Things”…

This is one for the community:

I love your blog. I just moved here from NYC a week ago and it’s been an invaluable resource.

I just found a rental that I love, [removed]. Gorgeous views, built in 1939 or so. Problem is, a friend from SF pointed out that it’s a “downhill home.” (I’d never heard the term before.) It’s cut into the face of the hill, but it’s partly on those stilt kind of things. The landlord says the hill is safe and the place was “thoroughly inspected” when he bought it…but he owns the place and needs a tenant, after all. :)

I’d love to rent it but want some reassurance that the thing won’t fall down the hill at some point. Like, if there’s a quake. Do renters ever do seismic checks here? How can I find out if this place really is safe? I don’t mind paying myself if the inspector fee is reasonable.

Thanks a lot

Thanks for your email, and I’m glad you like theFrontSteps! Please tell your friends.

I don’t handle rentals, so I’m not one to speak with 100% certainty. I would imagine that you could do any kind of inspection you wanted as long as it doesn’t cost the owner anything.

The fact is, if a big quake hits SF, who the heck knows what will happen. A big rain might be more likely, and more of a concern….landslide.

My advice would be to go ahead and inspect if it will make you comfortable, the owner is okay with it, and you have the time to do so. But, don’t expect any person to tell you without a shadow of doubt that the home is 100% safe. You can thank the litigious society we live in for that.

When you’re ready to buy, let me know! If you have any money for down payment at all, I would HIGHLY recommend buying. Prices and interest rates are crazy low, and your payments would likely be less than rent.

Thanks for reading theFrontSteps!

Ask Us: Death “On” Property Or Not? Should You Disclose?

This just came to me by way of email.

Hypothetical question.

Assume a house burned down and a firefighter died a few days later from his injuries.
Same for a contractor falling from the roof or any other work related accident on the property.
What are the consequences regarding the disclosures of a subsequent sale?

Please do not discuss the specifics of a recent event/specific house, I’m only interested in the “what if that happens to my own house” – such as
does this qualify for a death in said property?
As a Realtor, would you advise to check or not the box?
How would you disclose this information?

What are the others aspects that you’d like you warn home owners (such as hiring only fully insured roof workers)?

Thanks

My advice: Disclose, Disclose, Disclose. If I know about anything pertaining to a property, I’m going to disclose that. The last thing anybody needs is someone to move into a home, decide to Google their address and find all kinds of information they never knew existed on the property.

I think this opens up the forum to a larger debate as to whether a death that came later from an accident on the property could be classified as a death “on” the property. I leave that to attorneys, but would certainly disclose any and all pertinent information. You see the pattern here? Disclose, disclose, disclose!

If There Is S&M And Leather Sex One Unit Below, You Might Want To Let Buyers Know [theFrontSteps]

137 Buelah Apple: Don’t Haight the Game….

[Written by “Eddy”:]

One thirty seven Buelah is one of those homes that just screams San Francisco charm and it has all the makings for what many families are looking for in a home here in the city (e.g., curb appeal, close to shopping, parking, etc.)
It’s no wonder that this property closed escrow back in 2006 in only 26 days and over asking at $1.59M.   It’s a little more surprising, however, to see that this same home just closed escrow in 2011, again for over asking, and in only 33 days for $1.61M.  It goes without saying that buying a good property with highly desirable features is a good strategy. This is a classic example of a well appointed home, commanding tons of interest, and getting a good price in two different real estate markets (2006 & 2011).

A few more pics after the jump:

“No Gross Stuff/Litter, Needless Honking, Speeding, or Menus!”

A resident’s plea to keep the sidewalk clean and free of stuff (like dog stuff?) , or as the owner/tenant put it, “No gross stuff/litter, needless honking, speeding, or menus!”

But wait…it gets better. Same owner/tenant and their sidewalk…


…and their entryway…

One has to think we might have a candidate here for A&E’s disturbing television show “Hoarders”.

But that’s not the point. The point is, the city could use a few more of these signs… billboard sized. Perhaps this resident could supply them? Red highlights and all?

Notice to Dog Owners [theFrontSteps]

San Francisco Real Estate Numbers For Real

From a reader in the comments:

I looked at the MLS sales volume and median sales prices year over year today, and sales volume is up about 38% for SFRs and condo/TICs, from 1354 in 2009 to 1875 in 2010. Median price is also up across just about all price tiers I looked at, which were 650 – 800K, 800K to 1M, 1M to 2M, 2 to 3M, and 3M or higher. 3M or higher was the only one that showed a lower median, and it was down about 70K. But there have been 35, 2010 sales to 19, 2009 sales for that tier.

Thank you.

Immediate Need: A Place To Park, Wash & Dump Bus Toilets

Hey guys,
I’m looking for commercial property in or near SF to buy or lease. I have been working with a broker out of San Mateo for the past year. Still haven’t found the property. Immediate need is a place to park, wash, & dump bus toilets by June 1.
Long term want is same space with building for service. Budget is $2.5M. Problems to this point are: local city won’t permit our use, or price is way past $2.5M. We are prequlified with B of A & have a letter.
I’m looking for a space to lease before June 1. I’m writing you because I don’t know where to start.

Well, let’s see if you came to the right place. Anyone (thefrontsteps@gmail.com)?

The Grinch Who Stole Our [Reader’s] Christmas Wreath (Caught On Tape)

From our reader:

Greetings,

I’m looking to enlist your support in some public shaming. You can also point-out the utility of installing a video camera system during a renovation :)

This Grinch stole the Christmas wreath from the front door of my house early Friday morning. She looks like a fairly put-together person, why is she out stealing in the middle of the night? Pacific Heights of course…

The Grinch comes then goes, and returns (cloaked/disguised) at 2:07.

Poor Pacific Heights. It gets such a bad rap…Maybe we need to put a little “Chopper” in Pacific Heights.

[Update: Some questions answered…

[Update #2: From the reader when we informed him/her of the # of links coming to our site for this post, “Good stuff indeed. Channel 7 wants to run a story on it tonight. And it seems the mystery lady has a name…” Guess you’ll have to check Channel 7 (anybody got the link to a report) for the name, and apparently a friend of the owner has placed a new wreath on their door, with a lock hopefully. ;-) ]

More Fun Posts:
Sexy, Sexy Realtors [theFrontSteps.com]
Metallica’s Kirk Hammett Finds A Buyer For His Pacific Heights Monster Den [theFrontSteps.com]
San Francisco Needs To Harden The F**k Up! [theFrontSteps.com]