Over the past 30+ years, the period between a recovery beginning and a major “market adjustment” (or bubble popping) has run 5 to 7 years. We are currently about 2.5 years into the current recovery.
Periods of market recession/doldrums following the popping of a bubble have typically lasted about 4 years. (The 2001 dotcom bubble and 9-11 crisis drop being the exception.) Generally speaking, within about 2 years of a new recovery commencing, previous peak values (i.e. those at the height of the previous bubble) are re-attained – among other reasons, there is the recapture of inflation during the doldrums years and simple pent-up demand.
Our complete article on market cycles can be found online here.
city in the United States, and it’s growing denser, more affluent and more expensive.
The charts included are mostly based on the San Francisco Planning Department’s excellent Housing Inventory and Pipeline reports, which can be accessed using the links at the bottom of this article. Quotes below are excerpted from these reports.
Packed with information, the data in one report section will not always agree perfectly with that in another – due to the multiple sources of data used by the Planning Department – and this is reflected in our charts as well. In the complex, lengthy process of new-housing application and review, public hearings (and, lately, ballot proposals), revisions, entitlement, permitting, construction and completion, how and when a project is counted may vary. Housing units are being built and being removed, and there are so many types: rental or sale, market rate or affordable, social-project housing or luxury condominiums.
Last but not least, this landscape is in constant flux – new projects, plan changes, and shifts in economic and political realities. Everything below is simply a good faith estimate. The basic reality is that San Francisco, after its recent 2008-2012 new-construction slump, is now experiencing a building boom. So far, however, it has not been able to keep up with population growth and rising buyer/renter demand.
Adjusting your screenview to zoom 150% will make the charts that much easier to read.
“Some of the larger projects completed in 2013 include: 1190 Mission Street (355 market-rate units and 63 affordable units), Rincon Green (277 market rate units and 49 affordable units), Nema (279 market rate units and 38 affordable units).”
“Very large projects (200 units or more) filed in 2013 and are under Planning Department review include: Mission Rock (1,500 units); 150 Van Ness Avenue (429 units); 41 Tehama Street (398 units); 1066 Market (330 units); 950 Market Street (316 units); and 1301 16th Street (276 units).”
Besides the above projects, rarely a week goes by in which new commercial property sales aren’t being announced – such as the Honda dealership lot and the KRON Building, both on Van Ness – with plans for large-scale residential development projects.
“There are currently 857 projects in the pipeline. Of these, 74 percent are exclusively residential and 17 percent are mixed-use projects with both residential and commercial components. Only 8 percent of projects are non-residential developments. A net total of 50,400 new housing units would be added to the city’s housing stock according to current data. Around 18 percent of all projects, representing 6,000 net added housing units and 2,750,000 sq. ft. of commercial space, are under construction. Around 20 percent of projects (with another 4,200 net units and 3,8 million sq. ft. of commercial space) have received building permit approvals. As of the time of writing, some may have moved to the construction phase.”
Typically, the smaller the unit, the higher the dollar per square foot value on sale or rental, however in San Francisco, 3+ bedroom condos are often high-floor units with spectacular views that sell for extraordinary sums – but these would be outliers to the general rule. The city plan appears to have a bias for 2-bedroom units, which it designates as “family units” – this may be an anachronism considering that 38% of city residents live alone and that SF has the lowest percentage of children of any major U.S. city. Of course, many singles and couples like to have a guest bedroom or home office.
However, in 2012, the city agreed to allow the construction of 375 “micro-units,” apartments of 220 to 300 square feet, including kitchen and bath. A few dozen have been built – one article mentioned a rental rate of $1850/month – and another 160 are under construction in the mid-Market area. It will be interesting to see how this trend develops (or doesn’t) in both the rental and for-sale markets. It might be a good match for the relatively young (but well paid), non-driving, high-tech workers pouring into the city.
The ability to take under-utilized commercial property sites and turn them into multi-unit or even high-rise residential projects is particularly prized: “There are 50 projects in the current pipeline database proposing demolition or conversion of existing [commercial] buildings to residential use.” “Nearly all units replacing office uses are in mid- to high-rise residential structures of 20 to 500 housing units in high density zoning districts. These projects are mostly concentrated in the eastern half of the city: Rincon Hill, East SoMa, Showplace Square & Potrero Hill, Transbay, Mission and Downtown.”
“Single-family building construction made up a very small proportion of new construction in 2013 (1%).” Very few new houses are built in San Francisco, as developers prefer to build higher density housing projects on our limited supply of land. The houses that are built are typically big and expensive.
“Seventy-six percent of the condominium conversions in 2013 (279) were in buildings with two or three units.” The rules governing condo conversion in San Francisco are byzantine, politically-wrought and ever-changing, and the changes affect the ability to convert existing multi-unit properties and TICs into condominiums. Two-unit properties are much the easiest to convert into condos and accordingly enjoy a sale price premium.
The units in these newer buildings command a premium both when rented or, as seen in the chart above, when sold – now surpassing an average dollar per square foot value of $1000. This is the major motivator for developers today.
“About 93% of the new affordable units are rentals affordable to very-low and low-income households.”
“Major affordable housing projects completed in 2013 include: 25 Essex Street (120 units); 701 Golden Gate Avenue (100 units); 474 Natoma Street (60 units); 1075 Le Conte Avenue (73 units); 60 West Point Road (54 units); and 61 West Point Road (13 units).”
There is currently proposed legislation to encourage the legalization of illegal housing units in San Francisco, estimated to exist in the tens of thousands. This is problematical because the reason most of these units are illegal to begin with is that they don’t conform to housing codes – ceiling height, light and ventilation, and fire safety issues are most common – and cannot easily, without substantial expense, be altered to comply.
From 2010 to 2013, the city added approximately 32,000 residents and increased the number of employed residents by roughly 56,000, many of them in new, well-paying high-tech jobs. In that same period, about 4,200 new housing units were added, not remotely adequate to meeting demand. And it is currently projected that the city’s population will continue to grow in coming years. When demand soars and supply is inadequate, prices and rents go up (in the city’s recent case, feverishly), and builders start building again as quickly as they can, hoping to catch the wave at exactly the right time.
review and approvals process:
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.
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.
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.
The November Case-Shiller Index report was released this week. Below are three looks at what has happened in Bay Area “high-tier-priced” houses (currently delineated as those selling for more than $801,000) since 2013 began, over the past 2 years – as the recovery really began in early 2012 – and since 1996, to show market cycles. Right now, ignoring small fluctuations up and down, home prices are basically continuing on the plateau they reached after the huge spring surge in appreciation.
Case-Shiller measures a 5-county metro area, not just the city of San Francisco. The numbers used relate to a January 2000 value of 100; thus 181 = 81% home price appreciation over the past 14 years.
2012 – 2013:
1996 – 2013:
The pundits are making dramatic, even doom-laden pronouncements about what is going to happen with interest rates (and the housing market), though they’ve been wrong so many times over the past few years, these “expert” predictions might be taken with salt-shaker’s worth of salt, perhaps with lemon and a nice shot of tequila.
Obviously, interest rates are an important component of the real estate market. But this chart gives a little context to what has occurred recently: the blue column is the average 30-year interest rate for the first 5 months of 2013, when everyone was dancing with glee at how low the rates were; the black line at the end represents the interest rate on Friday, June 6th, though it is true that it briefly hit 2 tenths of a percentage point higher earlier in the week (so if you like, add the tiniest smidgeon more to the black line).
I don’t know where interest rates will go, though they will probably rise over time—and perhaps there will be an upcoming interest-rate shock. But terror seems a bit premature.
The Economist has a good article (about the US real estate market not being in a bubble) and created a terrific interactive graph that allows you, by metro area (you have to click on San Francisco to add it to the graph), to compare home price changes in real terms over time, versus average incomes, and versus rents, from 1987 to 2013. San Francisco is at the top of the chart in percentage increase and increases in prices in real terms, but still rates right at the long-term average in home prices versus income and versus rents. The Economist was one of the very first to identify the housing bubble inflating – running strongly against the then current opinion of other pundits – so I think their opinion on whether another bubble is about to burst in the U.S. is worth hearing. (FYI: The do believe there are serious housing bubbles in certain other countries.)
”The verdict: in most markets houses are near or above their long-run values, but none looks bubbly. Price rises in Phoenix, Tampa and Miami have restored values only to their long-run averages. In Las Vegas they are still below that long-run average. Many things could trip up the housing recovery, from stalling job growth to higher mortgage rates; at the moment, a bursting bubble is not one of them.”
You can play around with the interactive chart, and you should read the article below the chart widget:
Here are 3 of their charts with San Francisco added:
Home Price Appreciation in Real Terms (Adjusting for Inflation):
Home Prices Against Average Income:
Home Prices versus Rents: