The Story Behind San Francisco’s “Extremely Low Inventory”

(It’s not because no one is selling)

Paragon Real Estate Group, April 2015

First some context: For the last 15 years, the number of MLS home sales in San Francisco has ranged from 4663 in 2009 to 7887 in 2004, with an average of 6115 per year. In 2014, MLS sales numbered 6120. Sales outside of MLS have increased as the market has become hotter (for both legitimate and not-so-good reasons), and non-MLS new-condo sales have also increased. These 2 categories of sales would swell the 2014 total.

From another angle, studies have estimated that on average about 5% of U.S. owner-occupier homeowners sell annually. According to the census, there are approximately 125,000 owner-occupied housing units in SF: 5% would equal 6250 home re-sales per year. Sales of tenant-occupied homes and new construction condos would be additional.

The numbers of new listings and home sales in San Francisco are certainly lower than expected in such a hot market and some of the subsidiary reasons are discussed at the end of this analysis. However, as seen above, annual sales numbers are not wildly out of whack from historical trends.

The principal factor behind the perception of drastically low inventory is simply hugely increased demand: Over the past 5 years, the city’s population and employment rolls have soared, while new housing construction has not remotely kept pace. Higher demand means homes sell more quickly, which then shrinks the number of listings on the market at any given time (which is really how we perceive supply). An analogy: The water hole (of listings for sale), fed by a relatively constant stream (of new listings coming on market), still gets significantly diminished as more people drink from it.

Below are 3 charts illustrating the issue. The first two, regarding days-on-market and percentage of listings accepting offers, are based on actual SF market statistics. The third chart is a sample illustration of the effect of increasing demand on the supply of homes for sale, even if the number of new listings coming on market doesn’t decline.

Chart 1: New listings are selling much faster.


Chart 2: The percentage of listings selling each quarter has significantly increased.



Chart 3 (sample illustration): Higher demand – even with a constant number of new listings coming on market – dramatically decreases the inventory of homes for sale at any given time.

There certainly are other, distinctive factors exacerbating our low inventory market:

1) As noted earlier, with the frenzied market, more sales have been occurring off-MLS, and these homes don’t show up as new listings in the public inventory for sale. (The Pros & Cons of Off-MLS Listings)

2) Annual sales of TIC units and 2-4 unit buildings have plunged in the last 7 years by over 500 sales, a substantial drop in an overall market of San Francisco’s size. This is probably due mostly to changes in SF tenant eviction and condo conversion laws. (Note: TIC units are a property type found virtually no place else but the city.)

3) With extremely high rental rates and extremely low mortgage interest rates, a small but growing percentage of homeowners, who typically would have sold their homes, are renting them out instead – and the Airbnb vacation-rental phenomenon (with even higher rent rates) can only be adding to this. (Renting vs. Selling One’s Home)

4) Unless they’re moving out of the area, some potential sellers are daunted by the challenge of finding new homes under existing market conditions and are simply staying put until things calm down.

5) A sizeable percentage of our new (mostly very high-end) condos are being purchased as second homes by the locally affluent or as investments by foreign buyers. These non-resident buyers add to demand and help soak up supply, and for a number of reasons, may not sell as often as typical homeowners.

In many counties other than San Francisco, the big decline in distressed property sales has affected inventory and sales.

The factors above are all probably diminishing listing inventory to greater or lesser degrees, but ultimately, it’s not that the annual number of new listings – i.e. the number of homeowners selling – is so drastically low by historical measures. It’s the relationship between supply and demand that fundamentally determines market conditions, and for the last 3 years, a relatively stable supply has become terribly inadequate to a dramatically escalating demand.

This, of course, is the classic dynamic which puts upward pressure on home prices.

*These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. All numbers should be considered approximate. Please contact me with any questions or concerns.

Are Overbids A Result Of Intentional Underpricing? No – It’s Competitive Pricing

It’s happened again – I did a post Friday about the week’s overbids, and the comments and emails immediately come in, “Is this because the owners are listing for under market prices to crest bidding wars?” or “Why do you always highlight overbids? Aren’t these properties underpriced to begin with?” or “These properties are selling at market price, so why all the hype about overbids?” or “Can you post comps for each overbid you show?”

It’s nonstop, so let me elaborate. The answer is no, most of these overbids are not underpriced, and no, most listings are not intentionally underpriced*. Most properties are “competitively” priced. In a market where buyer activity drives property values up, we have learned (this isn’t San Francisco’s first crazy real estate rodeo) it is best to price a property lower than where you expect it will sell, get a lot of people through the door, and let the buyers set the new market price for any particular property. It is the best way to get the highest price for the seller. The truth is, in this market, we listing agents have run out of crystal balls and simply don’t know what true market value of a property is until you open it up to the hordes of buyers out there, and let them do their thing.

Additionally, buyers have become accustomed to looking at property priced lower than what they expect to pay in the end. So if you list higher than what they’re searching, you won’t get them through the door. For example, a buyer that is expecting to pay $1.2M on a property is likely looking at properties priced well below that (in the $800-995,000 range), knowing they have to bid over. It’s mean, and totally wrong, but it is the way it is. If you bring a property to market at the higher price you hope to achieve, you might get less buyers through the door, no offers in the end, and end up “chasing the market down”, which is not a fun thing.

The last three listings I had blew our (mine and my clients’) minds. We had expectations as to where they might sell, and even entertained the idea of an off market sale, but man were we glad we didn’t go that route. In each situation we received at least 10% more than what we originally thought was “market value”. Did we intentionally price it low? No. We really didn’t know exactly where it would end up selling, so we priced it competitively knowing the buyers will set the market price, and they did, and always do.

It’s frustrating being a buyer in this market, no doubt, but it’s stressful being a seller too. Selling a property for an exorbitant amount of money, regardless of how much over asking an offer might be, is not entirely relaxing. Appraisers strike the fear of God in sellers, because each new appraisal is at a level not yet seen. Hence the draw of accepting cash offers over those with loans. Miraculously appraisals keep coming in at value, but sometimes other things can derail the process too, and then what? Re-list? List at higher price? Are the same buyers still out there? Will you get that magical (through the roof) number again? Do you put the backup offer in (if they’re still there)? So many variables cause so much stress, but that’s another topic altogether.

The bottom line is the overbids that are highlighted here and make headlines are not so much about property being underpriced, as much as they are about the multitude of buyers out there willing to go to astronomical heights to realize their dream of owning property in San Francisco. Arm chair analytics are great for SocketSite, not so great for listing your home on the market, or trying to be the lucky buyer that wins in a market with far too little supply, and over-flowing demand.

So take these overbids with a grain of salt, and if MLS was smart, they’d add a category when reporting sales that will show us all the number of offers on any given property and any given overbid. That’s the real stat to focus on. For every property that gets sold there are usually 10-15 buyers (at least) that just lost and are moving on to the next one, and ready to go crazy big just to be done with it.

I hope that sheds a little light on the matter, and I hope it clears up the air around most of us real estate agents that are simply doing what it takes to get the seller the highest and best price for their property. It’s a bit of a game, but if you know how to play, you can win. As always, I’m here to help you buy and sell, because I do know the game, and I do know how to win.

*Some agents do intentionally underprice property, and some agents do use this as a way to brag about getting “$$$ over asking on my latest listing, I can do the same for you.” But those agents are the exception, not the rule, and you should avoid them.

Last Week’s Top 10 Real Estate Overbids-San Francisco [theFrontSteps]

San Francisco… You So Bad Ass!

From the San Francisco Association of Realtors:

Scarcity of Defaults Demonstrates Enduring Value of San Francisco Real Estate

Of all U.S. mortgage holders, about one quarter, or 11.3 million households, is underwater, meaning they owe more than their homes are worth. In California, the percentage is even greater—35 percent.

According to First American CoreLogic, the tipping point appears to come when a home owner has a negative equity of 25 percent or more. At that point, many owners choose to cut their losses and voluntarily walk away from their homes. To prevent this result and to avoid a costly and time-consuming foreclosure, banks typically encourage owners to market their property as a short sale.

So, how does San Francisco and the northern peninsula stack up against the rest of the country, and the State as a whole? These areas are doing much better. The percentage of home owners underwater in the San Francisco-San Mateo-Redwood City area is only 10.4 percent. And the percentage of home owners underwater by 25 percent or more is only 2.6 percent.

Real estate sales in San Francisco and the northern peninsula may be lagging previous years but real estate values have remained strong through one of the worst economic downturns since the Great Depression—a fact of which homeowners and prospective buyers should be reminded from time to time.

“San Francisco Housing Market Continues To Strengthen”

This pulled directly from the San Francisco Association of Realtors Newsletter:

San Francisco’s Housing Market Continues to Strengthen Unlike Many Other Areas of the Country

Falling inventory levels and strong sales activity in December, 2009, helped to drive continued improvement in San Francisco’s housing market, according to the latest Market Focus report issued jointly by Rosen Consulting Group and the San Francisco Association of REALTORS®. The median single-family home sales price increased for a third consecutive month in December reaching $755,608. That represents a 7.9 percent increase from December, 2008. The report attributes the improved market conditions to a drop off in foreclosure sales and a growing proportion of sales in higher priced neighborhoods.

Median Condominium Sales Price Increases for First Time Since July 2008

The report observes that the condominium market also seems to have turned a corner, as the median sales price increased by 7.6 percent to $672,590 in December. It was the first year-over-year increase since July 2008.

According to John Lee, president of the San Francisco, “The reduction in asking prices, mortgage rates of less than or near 5 percent and federal tax incentives have increased housing affordability and attracted buyers to the condominium market.” But he notes that “sellers of higher-priced properties have benefitted less from incentives as sales are closed only after significant negotiations from original asking prices.”

Closed and Pending Sales Activity in December Remained Relatively Strong

As expected, closed and pending sales activity dipped during December as a result of seasonal patterns. But despite the slowdown, closed and pending single-family sales activity that month outpaced similar activity in December of both 2008 and 2007.

According to the report, the single-family months of supply inventory fell to 3 months in December 2009 from 5.8 months in December 2008. The condominium months of supply inventory fared less well dropping to 4 months from 7.2 months during the same period. With inventory levels falling, Lee anticipates that the price increases seen in recent months will continue and possibly intensify.

The Rosen Consulting Group sounds a note of caution in its report by saying that a number of factors could delay the further strengthening of San Francisco’s housing market. Principal among these would be an increase in distressed properties that would add to the for sale inventory and put downward pressure on prices and the anticipated increase in mortgage rates that could rein in home buying activity. But the Group’s outlook is increasingly positive and it believes that if these eventualities would happen, “it would only be a bump in the road to long term growth in the San Francisco market.”

Ask Us: Why The Fuss About Noe Valley?

Where readers ask, and we (the community) try to answer:

The Front Steps really concentrates on Noe. I live in Noe and understand the attraction and the desirability of neighborhood but I’m not exactly sure why it is the barometer for everywhere else. Can you shed any light on this?

Good question. It’s not that we set out to focus on Noe, in fact we think focusing on an area that is much more hip (like Mission, Dog Patch, or NoPa) would serve our readers better and certainly be a helluva lot more fun, but looking at the real estate in Noe Valley is a very good barometer for the well being of the entire city’s real estate market, because it is considered an A+ location with generally financially and employment secure residents. Noe Valley is one of the most desirable and popular areas to live in San Francisco, and if the market in Noe Valley crashes, the rest of the city should watch out. SOMA is tanking as we speak, but it has nothing to do with Noe Valley. It is a totally different market.

As you’ve also likely noticed, a lot of the content we post comes in as “tips” from readers and our readers that send tips must be a bit more concerned with Noe. So feel free to tell your friends that live in other nabes to check us out and send in tips about their hood as well. It doesn’t have to be about real estate, but it does have to be about San Francisco (or at least the greater Bay Area.)

Thanks for reading!

Reader Reports: Who’s Getting Your Loan Approved And Why?

“San Francisco’s number one closer”:

While you’re at it:

http://abclocal.go.com/kgo/video

Once you are at the link, look for the “7 On Your Side” tab in the Video Library part of the webpage and click it.

You’ll see a picture with the heading “Marketing Ploy Disguised as Government Offer” and a HUGE Mike or Darius. That’s the video – watch it!

What’s the connection you ask?

The Loan Sharkz is a mortgage company that went belly up—Bryco Funding a few years back. It looks like the guy who answers the door [in the ABC local video] looks just like one of the guys who made the “Loan Sharkz” video and starred in it…

Indeed it does, and as always, thanks for the tip!

Anybody can be involved with this site. Send tips, story ideas, content, love (or haight) mail to thefrontsteps@gmail.com.

East Bay: How Piedmont Brings Out the Worst in Me

By Home Girl, aka real-estate blogger Tracey Taylor).

Go to Piedmont and you feel you have entered another world. That’s if you live in Berkeley or Oakland or anywhere else where you are a mere mortal.

I suppose Piedmont is the East Bay’s equivalent to Pacific Heights. Rarefied, privileged, cocooned. The median list price here for a SFH is $1,236,000 (admittedly a tad lower than Pac Height’s $3,357,000, but you get the picture).

I saw a couple of Piedmont listings this weekend. The first was a pink chateau (above) priced at $3,295,000; the second, a 1950s one-level given a complete contemporary overhaul (below), was $745,000 less expensive, but by far the more interesting proposition in my humble opinion.

If you are the old-school type who favors traditional interiors and bourgeois accommodations, the chateau is for you. If, however, you like something a little more risque — a splash of California indoor-outdoor living, a few floor-to-ceiling windows and a handful of sumptuous bathrooms thrown in — then opt for the newer model (below).

Both homes have been on the market for 64+ days, and I would want to know why the second one, at 43 Farragut Avenue, has changed hands no less than four times in the past 11 years (beginning in 1997 — a snip at $1,250,000). But if you’re after more bang for you buck than in the Heights, these are both worth investigating.

Oh, I did visit a third open house on my tour of Piedmont:  224 Ricardo Avenue is a perfectly nice house in a perfectly nice area, but it costs $1,275,000 and, to be honest, I felt like I was slumming it. That’s the effect Piedmont has on you if you spend more than enough time there.

Above: your new neighbors should you choose to buy 43 Farragut Avenue in Piedmont.

Ask Us: “Change in Home Buyer Mentality?”

Where readers ask and we (the community) try to answer:

We’re planning to put our house on the marketing in a couple weeks. Have you seen any change in the SF home buyer mentality resulting from the recent news from Wall Street? I assume it varries by price range, but I’d be interested in your thoughts on how houses in the 1M – 1.5M range might be impacted in the weeks to come.

We could go around in circles on this question, depending on a number of factors (location, size, condition, amenities, views, etc.), but in a nutshell and to answer your question…yes. The market has been impacted, and given the recent near 700 point drop in the stock market, could be impacted more. Loans are harder to come by, and buyers are sitting on the fence. That said, if you have a desirable property in a nice area, it will likely still sell, and a buyer out there ready, willing, and able to qualify for a loan is likely looking for just what you have to offer.

That’s our $.02…

Readers?