Over the last 13 months, for a variety of compelling economic reasons, home-buyer demand in San Francisco has continued to grow ever stronger, while the inventory of homes available to purchase has only become tighter. This is the classic supply and demand dynamic — increased competition for a scarce commodity — that leads to increasing prices. Our inventory crunch, at least so far in 2013, is not easing. This situation is advantageous to sellers, and difficult and aggravating for buyers (and their agents): the time, effort, emotional energy and money that it takes to find and buy a home have all been increasing.
However, if buyers can summon the patience and endurance to see the process through, they might take some solace in the last 2 real estate recoveries, in the eighties and nineties. As can be seen on charts further down, it’s not unusual for repressed buyer demand to explode after a long down market, creating the same rapid appreciation situation we are experiencing now. But even with increasing competition and rising prices, those who purchased in the first few years of the past 2 turnarounds ended up doing very well with their investments. We don’t know if this recovery will continue to follow the same trend lines as past market cycles, but it has thus far.
If you adjust your screen view to a Zoom of 125%, the charts will be that much easier to read. In Windows systems, you can do this by pressing the Control and + keys simultaneously.
Is Everything Selling Over the Asking Price?
No, of course not: not all listings are selling for over list price. Some homes still go through price reductions and some don’t sell at all, but it is true that a large percentage of SF listings is now selling for over asking price and sometimes far over. This is especially the case with houses, where 1 in 4 sold in the past 2 months went 10% or more over the list price. (Note: Homes selling for within a quarter percent of the list price were considered to have sold AT asking price.)
And this chart shows the dramatic increase in median home prices in 2012:
New Listings vs. Accepted Offers
There are two issues behind the current low inventory crunch: firstly, there’s the simple matter of fewer listings coming on market, and secondly, that the listings that do arrive are being snatched up very quickly. This chart compares the influx of inventory and buyer demand in January of the last 4 years. Currently, on any given day, the choice of listings available to purchase is far below that of previous years — which fuels fierce competition between buyers.
This chart illustrates the overall decline in listings for sale:
Ratio of Expired Listings to Sales
Even in a hot market, not every listing sells: some listings viewed as overpriced end up expiring or being withdrawn. However, the ratio of expired and withdrawn listings to sales declines significantly in a strong market, which is what happened last year. Typically, the fourth quarter is marked by a very high rate of expired and withdrawn listings due to the holiday season and end of the year, but in the last quarter of 2012, buyers continued to aggressively snap up listings.
And this is a days-on-market chart illustrating the increasing speed with which buyers are snapping up listings:
Perspective on Three Market Recoveries
This Case-Shiller chart for the 5-county SF Metro Area begins with the recovery following the market recession/ doldrums of 1991 – 1995. The market of 1996 and 1997 had basically the same dynamic of repressed demand exploding alongside a recovering economy that we’re experiencing today. (All chart numbers reflect a percentage of the home values in January 2000.) There followed a 100% increase in values over the next 5 years, even before the inflation of the big bubble of 2004-2008. Buyers who bought in the mid-late nineties ended up doing quite well.
This chart shows the same dynamic in the transition from the late seventies/ early eighties recession to the mid-eighties rebound. Those buying in the early years of that recovery also did pretty well, even factoring in the following recession and market correction:
Supply & Demand
The chart above and the one below display two classic measures of supply and demand. The lower the months supply of inventory and the higher the percentage of listings accepting offers, the stronger the demand when compared to the supply of homes available to purchase.
Million-Dollar Condos: Percentage Selling by Quarter
Renting vs. Buying
This analysis below (just 1 part of a full report) compares buying a 2-bedroom SF home at the current median price of $775,000 to renting a 2-BR at the current average asking rent of $3800. It illustrates how buying can make excellent financial sense after tax benefits and principal pay-down are factored in, much less building substantial home equity over time. In this analysis, the “net” house payment comes out well below the rent. However, these scenarios depend on many assumptions such as interest, appreciation, inflation and income-tax rates. It depends on the rent one is paying and having the 20% down payment and closing cost monies available. Still, there’s no doubt that with current interest rates and rents, the equation is much more favorable to buying than it has been for a very long time.
Feel free to perform your own analyses using our Rent vs. Buy calculator, which can be accessed using the tab on the top of this webpage to Tools and Resources, then selecting Mortgage Calculator, then Rent vs. Buy Calculator. After putting in your numbers, be sure to click on Calculate and View Report:
This scenario depends on a number of factors, assumptions and projections. Buyers should review their specific financial situation with a qualified accountant and loan agent. Tax laws and interest rates (and much else) are subject to change.
Statistics are generalities and should be considered approximations: How they apply to any specific property is unknown. These analyses were performed in good faith with data derived from sources deemed reliable, but they may contain errors and are subject to revision. If you have any questions, please don’t hesitate to contact us.em>
© Paragon Real Estate Group, February 2013