Market Statistics

New Case-Shiller report: SF Metro Area bumps up again

While the nation as a whole saw a tiny decrease in the S&P Case-Shiller Home Price index in the January report released today, the San Francisco Metro Area Index (for 5 northern counties) bumped up again. The C-S Index for higher priced houses has now completely re-attained the previous market peak set in 2006, as measured by January data points. The city of San Francisco itself has exceeded the rise in the 5-county area and has generally surpassed previous peak values – many SF neighborhoods by substantial margins.

Based upon what we are seeing on the ground, we expect to see further increases once the late winter/early spring selling season is reflected in the Index.

This first chart shows market cycles over the past 30 plus years. The second chart shows appreciation since our current market recovery began.

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This chart tracks the most recent market recovery which began in earnest in early 2012. In both 2012 and 2013, the spring seasons saw substantial jumps in home values. We recently thought the likelihood of yet another significant jump in 2014 to be relatively low, but the market we’re seeing on the ground – a very high demand/very low supply dynamic – is leading us to suspect otherwise.

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Case-Shiller measures a 5-county metro area comprised of San Francisco, San Mateo, Marin, Alameda and Contra Costa counties. The numbers used relate to a January 2000 value of 100; thus 184 signifies 84% home price appreciation over the past 14 years. The Index is published 2 months after the latest monthly reading, i.e. the January Index has just been published today, March 25th.

The full report can be found online here.

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September Case-Shiller Index Released

The Case-Shiller Index for the San Francisco Metro Area covers the house markets of 5 Bay Area counties, divided into 3 price tiers, each constituting one third of unit sales. Most of the city of San Francisco’s house sales are in the “high price tier.” The Index is published 2 months after the month in question and reflects a 3-month rolling average. September’s Index was just released today, November 26th.

This first chart illustrates the price recovery of the Bay Area high-price-tier home market which really got under way in 2012. In both 2012 and 2013, home prices surged in the spring and then plateaued in the summer-autumn. The surge in prices that occurred in spring of 2013 was particularly dramatic, reflecting a frenzied market of huge buyer demand, historically low interest rates, increasing consumer confidence and extremely low inventory. In San Francisco itself, it was further exacerbated by the high-tech-fueled explosion of new wealth. The market has since calmed down somewhat and that cooling is reflected in the Index readings of the past three months (through September).

Case-Shiller Index numbers all reflect home prices as compared to the home price of January 2000, which has been designated with a value of 100. Thus, a reading of 180 signifies home prices 80% above those of January 2000.

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This second chart reflects what has occurred since 1996 showing the cycle of recession, recovery, bubble and decline/recession.

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This third chart compares the 3 different price tiers since 2000. The low-price-tier’s bubble was much more inflated by the subprime lending fiasco – an absurd 176% appreciation over 6 years – which led to a greater crash than the other two price tiers. All 3 tiers have been undergoing dramatic recoveries, but because the bubbles of the low and middle tiers were greater, their recoveries leave them well below their artificially inflated peak values of 2006. It may be a long time before the low-price-tier of houses regains its previous peak values. The high-price-tier, with a much smaller bubble, and little affected by distressed property sales, is now pretty much back to its previous peak of 2007. Many specific neighborhoods in the city of San Francisco have now surpassed previous peak values.

It’s interesting to note that despite the different scales of their bubbles, crashes and recoveries, all three price tiers now have similar overall appreciation rates when compared to year 2000: ranging from 72% for the low-tier, to 80 to 83% appreciation for the mid and high tiers, over the past 13 years. The gap is relatively small and has been converging in recent months.

Different counties, cities and neighborhoods in the Bay Area are dominated by different price tiers.

Remember that if a price drops by 50%, then it must go up by 100% to make up the loss: loss percentages and gain percentages are not created equal.

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Bay Area Home-Value Map

Home Values around the San Francisco Bay Area

A map of median house sales prices by city and town
for 3rd quarter 2013 sales reported to MLS.

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In the map above, “k” signifies thousands of dollars and “m” millions of dollars. In one or two instances where the number of sales was insufficient for meaningful statistics, the median sales price is for the 2nd and 3rd quarters combined.

Maps that break down median sales prices and average dollar per square foot values for houses and condos in the different San Francisco neighborhoods can be found here:

SF Neighborhood Values Maps

Median Sales Price is that price at which half the sales occurred for more and half for less. The single median price for a town, city or neighborhood almost always disguises an enormous variety of sales prices in the underlying, individual home sales: For example, median house sales prices in the city of San Francisco range from under $500,000 to over $4,000,000 by neighborhood. Median sales prices may be and often are affected by other factors besides changes in value, such as seasonality; changes in financing conditions, buying patterns and available inventory; and significant changes in the distressed and luxury home segments. Short-term fluctuations are much less meaningful than long-term trends.

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Analysis – Home Ownership as an Investment

Home Prices, Inflation, Leverage & Home Equity
Paragon Real Estate Report, October 2013

First and foremost, any home purchased needs to work as a home: it fulfills your housing needs at an affordable monthly cost – ideally, a cost, after tax deductions and principal pay-down, less than or similar to that of renting the property. However, though it cannot be compared on an apples-to-apples basis to investments such as stocks, bonds and CDs (that you don’t live in), it’s worth looking at the issue of home ownership as a financial investment as well.

If you increase your screen-view zoom to 125%, the charts will be easier to read.

Home-Price Appreciation vs. CPI Inflation since 1988 
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This chart compares, over 25 years, the amount of inflation per the Consumer Price Index (CPI) to price appreciation for high-price-tier homes in the 5-county San Francisco Metro Area per the Case-Shiller Index. (Most of the City of San Francisco’s housing is in the high-price tier, the upper third of Bay Area unit sales.) In this chart, 1988 equals a price-value of 100; 127 equals a price 27% higher than the price in 1988 for the same goods or house. CPI inflation is relatively slow and steady: the average across the past 25 years is a little less than 3% per year. Home prices, however, jump dramatically up (appreciation) and down (depreciation) depending on the market cycle, but average appreciation from 1988 to mid-2013 was about 5% per year – though this calculation can vary greatly by the exact start and end dates chosen.

An average SF Metro Area home purchased in 1988 appreciated by 244% as of July 2013, while the overall CPI inflation rate was 97%. If the home had been sold at the recent bottom of the market, the difference would have narrowed to 165% appreciation vs. 95% inflation. Purchase and sell timing always matters and if one has to sell at the bottom of the market, it affects the return on any investment. As the chart illustrates, home-price appreciation usually outpaces inflation by a significant margin over the longer term: this is a good thing for homeowners and doesn’t include other benefits such as living in the property and the capital gains exclusion on the sale of a principal residence.

This analysis applies well to homes purchased with all cash and no financing. Leverage alters the picture substantially.

Leverage (Financing), Inflation and Home Equity Growth
Home-Price_vs_Home-Equity_Appreciation
If one leverages one’s home purchase by taking out a loan, then the growth in one’s home equity dramatically outpaces inflation over the longer term. For the sake of simplicity, in the example above, we’ll assume that home price appreciation and inflation both run at 3% per year, and that the buyer put down 20% in cash plus closing costs, and financed the remaining 80% with a 30-year fixed rate loan. In this scenario, each year that the inflation/ home appreciation rate is 3%, one’s home equity asset grows by about 15%, plus the principal repayment on the outstanding loan (which is a major component – like a forced savings account – in the growth of equity over time). Indeed, the higher the inflation rate, the greater the equity growth. If home price appreciation outpaces inflation as well – as it has over the past 25 years – that accelerates the increase in home equity further. Moreover, the financing cost is currently subsidized by the mortgage interest tax deduction, if that applies to your financial situation.

This is why, using reasonable leverage, real estate is typically considered a good long-terminvestment – short-term can be much riskier – as well as an excellent hedge against inflation. Of course, if leverage is abused as it was in the years of subprime lending, underwriting standards decline, predatory lending and home-refinancing frenzy (i.e. “using one’s home as a piggy bank”), other risks arise.

In earlier times, when people didn’t move around as much, one bought one’s home, paid it off over the years and when retirement came, had a home owned free and clear – a huge financial asset to be used as appropriate.

Ongoing Homeownership Costs vs. Rental Costs over Time 
Home-Payments_vs_Rents-at-CPI
In this chart, the increase in the annual cost of homeownership with a fixed-rate loan is compared with the increase in rent at a 3% inflation rate, and the increase in rent of a home subject to San Francisco rent control, where annual rent increases are limited to 60% of CPI. As seen, if one locks in a fixed mortgage interest rate, the increase in ownership cost is limited to the increase in property tax costs (limited under Prop 13) and maintenance expenses, while the entire rental cost may be subject to annual raises. Over the longer term, one’s ownership costs become more and more attractive when compared to rental housing costs subject to inflation. If one owned the home for the full 30-year loan period, the monthly mortgage payment itself would disappear.

We have generated two sample rent vs. buy scenarios for San Francisco here:

2-BR Apartment Rental vs. Condo Purchase and 3-BR House Rental vs. Purchase

And you can perform your own rent vs. buy scenario calculations here, using your own financial circumstances, assumptions and projections: Rent vs. Buy Calculator

Important caveats: Trying to compare buying a home to other financial investments on an apples-to-apples basis is impossible, because there are so many other variables at play: the use and enjoyment of the home, how the cost of homeownership compares to renting, physical condition decline over time (without further investment), risks and returns on other types of investments, home tax deductions, the capital gains exclusion on profit from a principal residence sale ($250k for single owner/ $500k for couple), market timing and other factors. All the analyses above are simply sample scenarios, looking at homeownership from a number of angles using a variety of assumptions. It is unknown whether they will apply to future trends.

As said in the first line of this report, first and foremost, any home purchased needs to work as a home: it fulfills your housing needs at an affordable monthly cost. If that’s where you start, with a fixed rate loan, and you don’t refinance out growing home equity, and you don’t have to sell during a market downturn (which, admittedly, isn’t always possible to avoid), then you should come out all right and more often, very well.

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Interactive Map, May 2013-Sept 2013 Home Value Review

Click the map below to explore neighborhood home values based on sales from May 2013 to September 2013.

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The median sales price can be, and often is, affected by other factors besides changes in market values, such as short-term or seasonal changes in inventory or buying trends.

The average dollar per square foot is based upon the home’s interior living space which doesn’t include garages, unfinished attics and basements, rooms built without permit, lot size, or patios and decks – though all these can still add value.

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July Case-Shiller Index Increases 25%, Year over Year

For the 5-County San Francisco Metro Statistical Area, all price segments showed increases, though the lowest price tier jumped the most – 4% — reflecting the rapid decline in distressed property sales. Overall, for all price segments, the jump over June was about 2.3%, which translates into an increase from 12 months ago of approximately 25%. Compared to the 19 other major metro areas Case-Shiller tracks, that puts our recovery as the strongest in the nation behind that of Las Vegas (which was perhaps the city hit hardest by the distressed property crisis and is still far below previous peak values).

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Six Months of Sales in District 7

Hard to believe we’re nearing the end of the third quarter here in 2013, but we are. Here’s a look back at the previous six months of sales in District 7 which covers Cow Hollow, the Marina, Pacific Heights, and Presidio Heights.

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