Overheated Real Estate Market? Yes. Bubble? We’re Saying No…

Many adjectives are used to describe San Francisco, but normal isn’t a common one – and the same can be said about our real estate market. Even taking into account its tendency to be different in one way or another, this past spring’s market was overheated by virtually any definition. Surging consumer confidence and huge buyer demand chased a deeply inadequate supply of homes for sale, abetted by interest rates so low that loans – factoring in inflation and mortgage interest deduction – were almost like free money. All this led to an extreme seller’s market, a feeding frenzy and dramatic price appreciation.

But not, in our opinion, a bubble. The Economist, one of the first to sound the alarm for the last bubble, sees no sign of a U.S. housing bubble, basing its conclusion upon historical comparisons of home prices with rents and incomes. Also, it is not unusual for the market to go somewhat crazy following a 4-5 year down cycle after all the repressed demand bursts forth – this happened in 1996-1997 too. Besides which, we are only about 18 months into the current recovery. Though real estate is susceptible to sudden economic and political shocks, in past cycles, recoveries have typically lasted at least 6-8 years before peaking. That doesn’t mean there won’t be any short-term market adjustments, up or down, for one reason or another, along the way.

There are some signs of a normalizing market. After a year of declines, the number of new listings in the 2nd quarter was a little higher than the 2nd quarter of 2012. Though this inventory was quickly gobbled up and overall supply remains very low, it’s a good sign more sellers are entering the market. Median prices may be leveling off after spring’s big pop – it’s still too soon to be sure, but summer often sees a cooling down. It’s not welcome news to buyers, but interest rates have increased from extreme lows – though remaining very low by any historical scale. (See below: The Sky is Not Falling.) The distressed home segment, which distorts markets, is disappearing in the city and declining everywhere. And new-home construction continues to increase: even though we won’t see much of this new inventory until 2014 and later, it’s a very positive sign.

San Francisco Median Home Prices

For both houses and condos, the second quarter saw jumps well above previous peak values. Median sales prices are affected by other factors besides changes in value – seasonality, inventory, buyer profile, big changes in the distressed and luxury home segments – but the dramatic increases do reflect rapidly climbing home values in the city. Though all SF neighborhoods have been experiencing striking appreciation, this does not mean that all of them have now exceeded previous peak values.

Sales Over & Under List Price

This chart illustrates the enormous percentage of listings that sold for over – and sometimes far over – asking price. One in four houses sold for 20% or more above asking, which in San Francisco often equals hundreds of thousands of dollars.

San Francisco Luxury Home Sales

No market segment has been affected more dramatically by the recovery than luxury homes. In an inventory constrained environment, it has far out-performed the general market in unit sales – general unit sales were actually down, second quarter, year over year. Our new report also delineates the neighborhoods which dominate high-end house and condo sales: SF Luxury Home Report

Interest Rates: The Sky is Not Falling

Not to diminish legitimate concerns regarding rising mortgage rates and their effects on housing costs, but this graph puts recent increases in context. At any time 2011 and before, the current interest rates, even after their recent big percentage jump, would be reason for conga lines of celebration in the streets. Rates had to rise from their historic and artificial lows – how far and fast this may continue is unknown to us, but we don’t presently expect big shocks to the real estate market in the immediate future.

Very Few Price Reductions

89% of second quarter sales sold quickly without price reductions, at an average of 8% over list price – a clear indication of overheating. Still, not every listing sold without a price reduction and some didn’t sell at all, but ended up withdrawn from the market – in the last quarter, over 300 listings. (Many of these will eventually be re-listed, often at lower prices, and then sold.)

What Sells Where

What district of San Francisco has more house sales than any other? Which area has far more condo sales? You may be surprised at the answers.

Distressed Home Sales

The distressed home market in San Francisco is dwindling into insignificance. In most neighborhoods, the effect of these sales has disappeared altogether.

New Listings Coming on Market

The second quarter saw an increase in new listings not only against the first quarter of the year, which is normal, but against the second quarter of 2012. This is a hopeful sign if it continues.

Months Supply of Inventory (MSI)

Even with the increase in new listings in the second quarter, inventory remains drastically low by this measurement of demand versus supply.

Listings for Sale

Average Days on Market (DOM)

Time on market before acceptance of offer has also hit historic lows for virtually every property type in the city.

Percentage of Listings Accepting Offers

This is another clear statistic measuring demand against supply, and it is at historic highs.

All data from sources deemed reliable, but may contain errors and is subject to revision. Statistics are generalities and how they apply to any specific property is unknown. All numbers should be considered approximate.


5 thoughts on “Overheated Real Estate Market? Yes. Bubble? We’re Saying No…

  1. This is an elaborate presentation, and I accept the authors’ sincerity, but consider the source. These are realtors. They are not impartial. They benefit from the bidding wars that ensue when buyers believe the “buy now or be forever priced out” mantras.

    Impartial experts have weighed in against a real estate bubble. For instance, there’s the quote above (“The Economist, one of the first to sound the alarm for the last bubble, sees no sign of a U.S. housing bubble.”). But these are assessments of the U.S. market. The San Francisco real estate market is unique.

    The last real estate bubble was fueled by ridiculous loans, which in turn was fueled by investors’ hunger for more and more mortgage-backed securities. That phenomenon appears to be a thing of the past. But that doesn’t rule out a real estate bubble in San Francisco. A bubble just means buyers are buying things at prices out of whack with their intrinsic value. This is often caused by speculation (“prices will only go higher so I know I’ll make a profit”) and anxiety (“if I don’t buy know I’ll never afford one”).

    There are many properties in San Francisco that are selling for way over asking, some as much as 50% over. Maybe these outlandish prices really are the correct intrinsic value and prices will keep going up. More likely, these prices are out of sync with reality, and the bubble will contract. Whether it contracts slowly or with a loud pop remains to be seen.

  2. Thanks for that perspective, Tim. I have to agree that it’s difficult to take a Realtor’s point of view without a grain of salt, despite the thorough research presented in this article.

    As an aside, I have to wonder if Realtors are benefiting from the current situation? Higher sale prices and a total seller’s market would seem to make their jobs easier, but the lack of inventory could be pinching their pockets at the same time.

  3. Dead Cat Bounce!

    Home prices are tied to wages which have remained flat or declined over the last decade, not rents, which are a false indicator and subject to rapid demographic and economic shifts.

    Also, these graphs are BUNK! they should chart prices from the year 2000 which is the starting point of the last bubble. Prices are still way above historic norms. The activity represented in these charts is INVESTOR activity, mainly transnational capital seeking markets, not normal working buyers. Per capita income in San Francisco places it 49th in the nation. Yet, SF usually comes in 2nd or 3rd in terms of home prices. DISCONNECT…don’t believe the hype, we are heading for another correction.

  4. Though this inventory was quickly gobbled up and overall supply remains very low, it’s a good sign more sellers are entering the market.

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