Hi sfnewsletter: First of all, your latest post “Good Bones” is insane! It is insane for what and where it is and by any manner with which we once looked at these things in the past. The Maximum overbid is also insane in this newsletter below (2155 9th Avenue that our friends bid on). As was that place on 15th that was in probate that we looked at. And much of what goes on in the hot neighborhoods is insane by past measures.
But by current and future measures, it is not insane. In fact it is completely sane. And the scary point is that it will be more this way in the future for San Francisco. Simply put, the economy in the Bay Area, and in San Francisco, has done well enough, the population has grown, there are no new single family houses being built in San Francisco, and there are certainly no new single family houses going up in the most popular neighborhoods.
There are two types of people in San Francisco: Those who bought before 1997 and those who bought after. And that split will have long-term effects.
That being said, prices are going to go as high as the highest bidder wants to bid. In hot markets like Noe Valley, Cole Valley, West Portal, Forest Hill, Inner Richmond, etc, there are numerically not that many properties to bid on so the market in those places is literally a handful of properties at any one time (actually more like maybe two hands). So, think about that – maybe 10 to 15 listings, with zero listings at all in some places like West Portal for weeks on end, and a good number of people with enough money who lost other bids to ready to hit the maximum overbid button.
Think about West Portal (District 4T). There are maybe ~800 properties in that district and weeks on end go by with nothing at all for sale. West Portal is a small district but others are even smaller like Forest Hill and Forest Hill Extension. Other hot areas that are larger also have small inventories.
One would think that these prices would elicit more supply. However, my feeling is that we’re seeing an interesting combination of forces that is actually causing supply, in some areas to contract:
Strong economy
Strong demand
Good financing options
Continuing attractiveness of San Francisco
Lots of buyers who have been repeatedly outbid and with cash to burn
High prices everywhere
One side-effect of this squeeze is that many are not selling because it has gotten so expensive – in all places, whether in San Francisco or the Bay Area.
The insight here is that the effect of the stratospheric housing prices (buying prices) is analogous to the effect that rent control has: it reduces supply because people become trapped in their properties. They can’t afford to move. It’s as true for M and me (prices are so high we have to rent, sell, and then buy, a real drag) as it is for the people who live in a house on Wawona in West Portal. Just like those in a rent controlled apartment, the more that time goes by, the more that they are less likely to move, it’s the same with property.
So what does it mean? Lots of rentals remaining rentals because they are gravy trains for those who can get market rents, and slow sales of those buildings which have rent controlled units that can’t be evicted.
On the bubble will be those “free and clear” properties that are sold as part of the normal process and those that are sold by estates (in probate or not) as people who hold out do eventually die (at some point).
This means that San Francisco will continue to develop parallel societies: immigrant renters, rich owners, regulated tenants, transient tenants. Will it affect things economically here in San Francisco? I don’t think so but others are not so sure. I think San Francisco will become an “ephemeral city”. And since it will take years to unfold, there is much time for the economy to adjust.
The trend I have seen in my office will continue: those 25 to 35 looking to settle down will leave town, either for outer suburbs or out of the Bay Area. I think one reason why the effects of this are hard to see is that so many people who would like to put down roots in the city can’t. So they leave. So the San Francisco we have is driven not by free market demand but by regulation since so much of SF is regulated (the reason there is so little supply for sale is that so many units are rentals either free or controlled).
I’m not making any judgments really, just trying to understand the market.
It’s interesting because this is a sign of how the world has changed. Parts of the U.S. have become like Europe, like the Old World, in that they are “filled up.” The postwar American dream of a house, good schools, is no longer possible in some of America whereas thirty years ago it was still possible almost everywhere. So, parts of America are still like the old dream (Texas, Atlanta, even most of Florida). But the Bay Area with San Francisco especially, L.A., the whole coast of California from LA to SD, NYC, they’re done, built environments. They’re for the super rich (to buy), the transient young before marriage or the gay population (to rent at market rates), or the rent controlled or immigrant families that pile in 15 to a place.
Housing costs reflect demand and the price of real estate is the driving factor, especially in SF. And it is the value of the underlying real estate that drives the prices as there is so little of it available, relative to demand.

D.L.-San Francisco, Lower Pacific Heights