Housing Affordability and Market Corrections

A look at San Francisco Bay Area housing affordability trends over time and how they intersect with real estate market corrections:


The 2008 San Francisco Bay Area real estate crash was not caused just by a local affordability crisis: It was triggered by macro-economic events in financial markets which affected real estate markets across the country. It’s important to note that in the past, major corrections to Bay Area home prices did not occur in isolation, but parallel to national economic events. Ongoing speculation on local “bubbles” often neglect to remember this.

Still, dwindling affordability is certainly a symptom of overheating, of a market being pushed perhaps too high. Looking at the chart above, it’s interesting to note that the markets of all Bay Area counties hit similar and historic lows at previous market peaks in 2006-2007, i.e. the pressure that began in the San Francisco market spread out to pressurize surrounding markets until all the areas bottomed out in affordability. This suggests that one factor or symptom of a correction, is not just a feverish San Francisco market, but that buyers can’t find affordable options anywhere in the area. We are certainly seeing that radiating pressure on home prices occurring now, starting in San Francisco and San Mateo (Silicon Valley) and surging out to all points of the compass.

San Francisco, with a Housing Affordability Index (HAI) reading of 10% is about 2% above its all-time historic low in Q3 2007, but affordability in most other Bay Area counties, while generally declining, still remain significantly above their previous lows. By this measure, the situation we saw in 2007-2008 has not yet been replicated.

Significant increases in mortgage interest rates would affect affordability quickly and dramatically, as interest rates along with, of course, housing prices and household incomes, play the dominant roles in this calculation.

Note that Affordability ratios are just one relatively blunt measuring tool, and there are certainly other factors at play affecting our real estate market: local (high-tech boom; surging population, employment and wealth; inadequate housing supply, rental rates, etc.), national (financial markets, unemployment rates, consumer confidence, etc.) and, nowadays, even international economic factors (such as recent events in the Chinese stock markets and the EU).

Information on the methodology behind the California Association of Realtors’ HAI can be found here.

Speaking of financial markets, we decided to take a look at how the recent volatility played out in the S&P 500 and the Shanghai stock indices. These indices are constantly fluctuating, but the general picture has not altered significantly since we graphed this in early November:


August Case-Shiller Index | San Francisco Bay Area

The new S&P Case-Shiller Index for August was just released on Tuesday. The prices for homes in the upper third of prices – which dominate in most of San Francisco, central and southern Marin, and central Contra Costa – ticked down a tiny bit in summer, exactly as they did last summer. These short-term fluctuations are common and not particularly meaningful until substantiated by a longer-term trend.

Since Case-Shiller’s SF Metro Area covers 5 counties, it should be noted that not all the markets within the Area move in lockstep: activity and appreciation rates can vary significantly.

As is clearly illustrated below, for the past 4 years, spring has been the big driver of home-price appreciation. Prices generally plateau in subsequent seasons until the next spring arrives. For the past couple years, the spring selling season has started very early, in late January or early February, due to the incredible weather we’ve had in those months. El Niňo, if it arrives, might move the spring pick-up in sales back to mid-March/early April in 2016.


This second chart illustrates the huge burst in prices this past spring. It’s not unusual for the market to slump a little during the summer holidays, almost in exhaustion after the spring frenzy. We’ll have more autumn statistics soon when October’s MLS data comes in, but Paragon has been experiencing its most active autumn selling season in its history in 2015.


And here are 3 longer-term charts for each of the 3 Case-Shiller price tiers for the 5-county San Francisco metro statistical area. As can be seen, the different price tiers had bubbles and crashes of radically different magnitudes in 2006 – 2009, but as far as total appreciation since the year 2000, all of them display very similar appreciation rates.




That ought to do it for your data craving for a while. You might consider following this blog via email (link below) or get on the Twitter train @theFrontSteps, so you don’t miss a beat of San Francisco Real Estate.

San Francisco Apartment Building Market Report

A little something different than what we usually post…

2015 Mid-Year Report by Paragon Commercial Brokerage

Median Sales Price Appreciation (Prices in Millions of Dollars)


Median sales prices are very general indicators in San Francisco since building location, size, age, quality of construction, tenant profile, rent control and financial returns all vary enormously. Still, the above chart gives an idea of the significant appreciation that has occurred in recent years for buildings of different size. Note that sales of larger buildings of 21+ units are very limited in the city: Only 5 sold in the first half of 2015 and about 2 dozen in 2014. SF is mostly a boutique market of smaller, older apartment buildings.

Median Sales Prices by District (Prices in Millions of Dollars)


This chart looks both at 2-4 unit apartment building sales and 5-15 unit building prices by district. 95% of the city’s residential multi-unit property sales are of buildings of 15 units or less, and about 80% are in buildings of 4 units or less. These comparative values can vary depending on the specific sales that close in a given time period, but the Pacific Heights-Marina district almost always comes out on top. Typically, the Noe-Eureka Valleys district and the Russian & Nob Hills district would have higher prices than the Hayes Valley-NoPa area, but due to the mix of buildings sold in the past 12 months, that was not the case. Some districts that have been gentrifying and appreciating rapidly, such as SoMa and the Mission, still have many older buildings, often of Victorian vintage, with very long-term tenants under rent control (which affects income and sales prices).

San Francisco Multi-Unit Building Sales by Price Segment


Sales of 2-4 unit buildings typically range in the $1 million to $3 million range in the city, while most sales of larger apartment buildings occur in the $2 million to $5 million range. However, there are transactions that exceed these prices by very substantial margins.


Average Dollar per Square Foot Values



Average dollar per square foot values are another angle on the market and they don’t always agree with median sale price trends. The first chart above reflects appreciation trends in SF and Alameda Counties. We suspect that the recent flattening of values in Oakland may simply be a misrepresentative anomaly: Short-term data is always less reliable than that of the longer term. The situation will become clearer in future reports.

Looking at the second chart above, note that smaller buildings typically sell at higher dollar per square foot values (but lower median sales prices) than larger buildings. Once again, the Pacific Heights-Marina district has the highest values; the Russian-Nob Hills district and the Noe-Eureka Valleys district come in second and third respectively.


Rent Rate Appreciation: San Francisco & Oakland by Year and by Quarter



Both San Francisco and Oakland have seen incredible appreciation in rent rates over the last few years, but in recent quarters, San Francisco’s increases have been slowing down, while Oakland’s have continued to surge. (Data from RealFacts.) Oakland is clearly benefiting from a classic “overflow” effect and has become a major go-to option in the face of SF’s extremely high rents. This is causing increased upward pressure on the market there.

As seen in one of the charts further below, there are thousands of new rental units recently built, under construction or planned for San Francisco. As they continue to hit the market, they may exert downward pressure on further rent rate appreciation, especially at the highest end: It will depend on exactly how much demand increases, or stabilizes as the tech boom plays out.

San Francisco Office Lease Rates


San Francisco office lease rates have been under similar pressure to residential rents: Huge demand competing for inadequate supply. However, there is an astounding amount of new commercial development now under construction or in the Planning pipeline. (See below.)


New Home Construction Pipeline


The San Francisco Business Times recently compiled an excellent analysis of SF residential housing projects: There are approximately 60,000 housing units (of all kinds) either under construction, approved for construction, or planned. Above is a very approximate chart of their data. Note that completion dates are notoriously hard to pin down; that the breakdown of rental, for sale, affordable and market rate housing units is often still undefined or may change before completion; and that some of these projects may not be built at all, depending on changes in economic conditions. Besides which, with plans constantly being revised and new projects being announced every other day, this is very much a moving target. A few of the very large projects in the pipeline – Treasure Island, Shipyard/Hunter’s Point, Park Merced – may take many years to complete.

It’s worth noting that, after decades in which virtually no market-rate rental housing was built in SF, there are approximately 20,000 to 30,000 such units in some stage of the pipeline now – obviously a function of the record breaking rents currently commanded in the city. One example of the types of projects being built – and the rents being achieved – is the recently completed, high-amenity, 754-unit NeMa complex on Market Street.

On the commercial side: According to the SF Business Times analysis, there are over 25 million square feet of new office, medical, retail, hotel and R&D space in the city’s commercial pipeline: a staggering amount. Over 8 million square feet are already under construction. Developers and investors in both residential and commercial development are making big bets that the boom times in the Bay Area have a long way yet to run.


San Francisco Market – Transaction Activity



The second quarter of the year is typically one of the busiest for the city’s 5+ unit market, but Q2 2015 saw a surprising slowdown in activity: Year over year, sales and listings accepting offers were down over 50%; new listings coming on market and total listings for sale were down over 25%. Market activity has fluctuated somewhat strangely since Q3 2014, when it was deeply affected by the threat of the anti-investor Prop G (which failed at the ballot box last November), and then rebounded strongly in Q4 2014 and Q1 2015. We’ll have to see how the rest of the year plays out before coming to firm conclusions as to larger market trends. Obviously, as seen above, prices have continued to appreciate.

Below is a list of Q2 San Francisco sales of apartment buildings of 5+ units. Please contact me if you’d like more details on any of these transactions or information regarding properties currently available to purchase. In real estate, the devil is always in the details.



2 Factors behind the Market



There are a variety of economic and demographic factors behind what is occurring in the Bay Area investment real estate market, but two of the biggest are the decline of interest rates to historic lows and the vast creation of new, well-paid jobs. Since 2007, interest rates have declined 35% and over 100,000 new jobs have been created in San Francisco alone. The first has an immense impact on the expense side of the P&L, and the second, through rising rents, has a similar effect on the revenue side. That’s a nice combination for owners and investors.


Apartment Building Sales by Broker


Over the past 6 quarters, Paragon Commercial Brokerage has represented more buyers and sellers in successful residential-investment property transactions in San Francisco than any other brokerage.

Please contact me if I can be of assistance in any way.

Recent Transactions [Alexander Clark]

Readers Ask: Readers Know (Usually)

The Frontsteps is littered with experts, so when a reader asks a question, seems like the highest form of logic is to simply pose that question to the aforementioned experts.

Yesterday I asked if any, any, any reduction in price could make being a landlord for a full occupied, multi-unit property worthwhile. One reader, in response, asked:

By deliadelia on Oct 1, 2009 |

Hey all, is any reader on here a landlord? Is it really as bad as all I hear? I am thinking of trying to leverage a tenant as income to buy a 2 unit building (1 empty, 1 occupied). I’m not sure what I’m getting into.

I’m nowhere near a landlord, not even in my dreams, so I can’t say much here. Anyone else able to help Delia?

Vultures, Commence Your Circling


Well, all, few and far between are homes we can look at and positively say: That’d be a good investment. Yet here is one, that frankly, given the size and location, has to be just that. The downside– yes, sorry, these days there simply has to be one- is that this could be a lonnnnng term investment indeed. It could also bring out the evil in a person that he or she didn’t even know existed; but the latter, I suspect, is often the result of becoming a landlord in this city.

Welcome to 1847 Stockton, 2/1 TIC on Telegraph Hill, listed at just $250K. At issue is the tenant currently occupying the property. This tenant is “protected,” and “is not moving.” Now, if we know our tenant/landlord laws in SF as well as we should, we know protected tenants are either:

  • Ill, too ill to move, or that moving may make them worse
  • Disabled: Again, the burden and expense of moving has been deemed unacceptable to these persons
  • Elderly: Same logic as above, given the large number of very fixed incomes allotted to those no longer working
  • Long term resident: 10 years or more in the residency= you cannot get rid of this person legally.

Andy Sirkin, oft credited as the pre-eminent font of knowledge on all things eviction and TIC related (which incidentally, this property is both) puts it this way:

Protected Tenants: Certain tenants are “protected” and cannot be evicted for owner-occupancy except in very limited circumstances. Protected tenants are those 60 or over or disabled who have occupied for 10 years, and those catastrophically ill who have occupied for 5 years. Also remember that no tenant with an unexpired lease can be evicted, and that tenants who occupy a unit during conversion to a condominium are entitled to remain for one year after conversion, or for life if they are over 62 or disabled.

We have no way of telling from this listing alone what group this tenant belongs too, but it could easily be any of the above, including the long term residency, since the current rent being collected on a 2 unit in North Beach several years beyond what this tenant pays: $795 a month. (Um, no wonder the tenant is “not moving!”)

So how then is this a good investment? Well, I already said: It’s a 2 bedroom TIC in a highly desirable area, also in a building that looks well cared for. We don’t know how the unit itself looks (no pics: bad sign), but we can find out by attending the open house on 11/22 or 12/6 from 9am to 10am. In fact, if anyone goes, email some details to The Frontsteps as I’d love to do a follow-up. And hey: if we find the tenant to be ill or elderly, maybe we can project that lifespan he or she has left and plan our investment accordingly. Or, perhaps if you know a good hit man? Ha, ha. Calm down, people! Of course, I’m kidding; but you can see how the tenancy laws might bring out the worst in landlords, or landlords to be.

In any case, this property does offer some potential if you can wait it out. The rent collected now won’t cover the mortgage, so it’s a good bet for someone who can pay cash for the whole shebang. And, kismet: The listing says “all cash sale.” That means then in 333 months (27 years) or so, you’d have your principal investment back and could commence profiting. Or, you get lucky, and the tenant would …disappear first.

Verbatim: “Is this the time to invest in land?”

From the recent New York Times article Sure, Land Is Cheaper. So Is It Time to Buy?:

THE real estate market may have cooled, but investor demand may soon be heating up for at least one type of property: land.

“The time is ripe to start looking; I haven’t seen this market in 20 years,” said Jaime Raskulinecz, a real estate investor and property manager from Verona, N.J., who wants to buy land in the hard-hit market of Cape Coral, Fla. During a recent visit there, she found lots for sale on or near the water at about a third to half below their peak prices of two years ago.

Before you go thinking it’s all gravy, read further:

“Because everyone’s running away, some people think it’s time to invest, but it’s not for the faint of heart,” said C. Joseph Blackbourn, the president and chief executive of Everest Holdings in Scottsdale, Ariz., an active buyer of home-building lots in the Southwest since late last year. “There are a lot of expenses in holding land.”

Land investors will need to have cash on hand to cover most of those expenses. “Lending has all but disappeared,” said Joel B. Shapiro, the chief executive of Timbervest, an Atlanta investment company that manages about 900,000 acres of timberland nationwide. Just as the credit crisis has made terms on home mortgages more stringent, land loans, already deemed riskier by lenders, are harder to get and typically carry even higher down payments and interest rates.

So what are some of the other costs associated with land ownership, besides high borrowing expenses? There are property taxes, of course, and there may be liability insurance (in case someone is injured on the property) and maintenance expenses (to cut the grass or provide other upkeep).

Owners will also need to ensure that the land is environmentally safe. Sometimes toxic trash may be dumped on the property “unbeknownst to you, and you’ll be responsible for the cleanup,” said John T. Reed, the publisher of Real Estate Investor’s Monthly, a newsletter. “At 2 o’clock in the morning on a moonless night, who’s to say what’s being put there?”

The point being (and reason we posted this), there are always opportunities in real estate out there (even in down markets), and many, many people get very rich dealing in real estate, many also go bankrupt. With a little education, a bit of timing, and a lot of discipline, now might be the time for you to pull the trigger on some real estate investments. Key to the equation…it doesn’t have to be in San Francisco, and it doesn’t have to be millions of dollars.

Sure, Land Is Cheaper. So Is It Time to Buy? [New York Times]

Green prefab?

by Tiffany Elston


I know what you’re probably thinking: a “green” prefab? Aren’t prefabs generally characterized by their cheap (and toxic) materials with no real aesthetic appeal?

Well that was until now! West Coast Green has decided to bring in a whole, full size beautiful green prefab to sit in Civic Center Plaza for the remainder of the week.

The mkLotus is designed by noted architect, Michelle Kaufman and built by XtremeHomes. The off site modular technology results in 50-70% less waste than traditional site building and has all the bells and whistles. The mkLotus comes equipped with a green roof, 100% solar generated power, rain and groundwater catchment system, gray water system, on-demand hot water heater and much more. The house was also designed to maximize daylight and cross ventilation while protecting occupant health with the use of no-VOC paints and other non-toxic materials.

If you don’t have time to attend the whole conference, at least make time to check out the mkLotus. And if you’ve got some extra time, Saturday of West Coast Green is specifically designed for homeowners. In addition to 250 (+) exhibitors on the trade show floor, there will be presentations on topics such as healthy homes, green design 101, and marketing and investing green.

[Tiffany has informed me that she has some passes, one of which I’ll take for sure, so if you’re interested, email her at tiffany @ greenkeyrealestate .com and you might get in for free to the trade show.]

West Coast Green

mkLotus official site

West Coast green mkLotus details


Saturday presenter schedule

The FlippingPad.com Launches…a First Impression


What the hell is the FlippingPad…besides a cool name? Actually, it’s a pretty cool site with very good intentions. In a nutshell, it is is a forum/blog/site for all you property flippers, aspiring property flippers, and past property flippers to get together and talk story. It has a national audience, albeit small but definitely growing, and there could be some good advice and/or deals to be found there. If you’re into real estate, it should be on your radar.  The message below is from one of the founders:

“We were fed up with current real estate communities. While many offer a wealth of information, we got lost in the shuffle. Our goal was to create a place to share and discuss real estate investing without being inundated by the get rich quick packages of the site’s founders. Many lesson packages and seminars are useful, we just wanted a site free of outside influence, where active investors could  potentially post projects, find partners and get “objective” advice.
The Flipping Pad promotes ethically responsible investing through shared knowledge. You’ll always get both sides of the coin on our site, or at least we hope so!”