Tuesday, July 1, 2014

The Middle Class Struggle to Obtain Property in San Francisco

It is worth being derivative sometimes; following suit in content, if that means we can better appreciate an important point.  The Wall Street Journal did a good job a few months ago highlighting the undeniable, fundamental challenge of the San Francisco housing landscape.  One quote read:

Workers are finding jobs by the bucketful in San Francisco, but housing supply hasn’t kept pace. About 4,000 housing units have been added in the past three years, for roughly 10,000 new households, according to the city planning department.

            rents are up 17% over the past three years.

            the housing shortage is “a crisis of our own making.”

The messy reality is that…any sustained boost in construction would require the city to overcome a slew of neighborhood and political forces that are aligned against building anything in a hurry, or in certain areas.

And so the paradox at hand is balancing the desire for affordable housing for all while maintaining best interests for existing homeowners.  The estimate within the piece is that it costs $650,000 to build an 800 square foot unit in a midrise building.  Further, it was reminded that building permits themselves must undergo discretionary review (in some cases).  

So in a nutshell, what we are dealing with here is a social problem very much opposite of what is happening across the nation: political activism seeks to push prices down, versus propping them up, in SF.  This is the challenge as to why areas like SF really cannot be compared to national averages.  It is also worth expressing how it can be relevant to pay attention to the local political agenda.

As for the “middle class”—a concept that needs its own elaboration—what is supposed to happen within the marketplace is supposed to play out as the graph below illustrates: 


And thus what agents, like myself of course, pay attention to are the how and when homes are sold for gains (unique and specific to individual seller preferences) and inventory returns to the marketplace at large.  That’s something to appreciate.

Monday, May 19, 2014

San Francisco Valuation Update

All real estate is local…

Good, got to get the aphorism out of the way first.  

Now one more: Numbers lie, numbers lie, numbers tend to…well…stretch the truth.

Let me merely highlight some of the complexity at hand by detailing two separate pieces of contrary fundamental evidence that come to two alternating conclusions. Beginning with the arguments then the evidence below each:

1.      Housing prices will cool down in SF:

·         Relative to national metrics, SF is an over-achiever. The 10-City and 20-City Case-Schiller index was up 13.6% and 13.4% over the past year. Pretty good year for housing at large (granted SF makes up 11% and 8% of those indices). SF, on the other hand was up over 20%! No denying that SF continues to outpace the national metrics.
·         The “Price-to-Rent” ratio for SF is now at 32x. The P/R ratio is a less-than-robust indicator of how much of an “earnings power” a home potentially has if one chose the landlord route. The reason 32x is considered high is that it is 14% higher than the ratio of 28x, which was the average spanning from 1989 through 2003. See blog(s) on Cap Rates for an analysis on evaluating rental success.
·         The “Price-to-Income” ratio for SF is at 4.8: meaning a home is nearly 5x an annual salary, which is about 20% higher than it was in the pre-boom era. National averages are not relevant to compare because the local marketplaces are desperately heterogeneous.

2.      Housing prices are supported and will continue to rise in SF:

·         Interest rates remain low and the Federal Reserve remains accommodative. The Credit spigot is still open and the 30-year fixed is high-fiving with 4.31%, as of the end of last week (source: Bloomberg).
·         According to the Brookings Institute, between 2007 and 2012 San Francisco had the widest spread growth of income divergence between the rich and poor. One has to step back and chuckle at the irony: in one of the most tolerance-promoted cities of America, home prices have reflected nearly the opposite outcome.
·         But it is not the fault of the people. The Elasticity Score of SF is among the lowest in the States. Translated: it continues to be extremely difficult for developers to build! With supply absolutely unable to meet the level of demand, only the wealthy continue to justify housing prices. The matter really is deeper—more sociological than purely economic.

The numbers by themselves do not give the whole story. Paying attention to fundamental trends is how to resound one’s self with the confidence needed to get a good price with the right justification.

Sunday, March 9, 2014

Striking it Rich near Gold(en) Gate Park

Prices of sold properties with performance data chart (click on charts to enlarge):

The annualized rate of growth extending back twenty years is an exceptional range of annualized compounded growth between 15% and 28%. Obviously, that was not the case every year, and is generally the challenge with projecting outcomes in less-than-one-year time frames. Some of the important differences between properties with different room counts are:

·        That 2 room properties have been the slowest to recover throughout the recent market cycle.
·        Since the mid 2000s, the rates of change between property sizes have begun to differ—where larger units (not surprisingly) began commanding more of a premium.
·        There appears to be stronger correlation and often very similar prices between 3 and 4 bedroom properties. This suggests better relative value with four bedroom properties.
·        The Inner Richmond region maintains a consistent price premium of 10% to 30% over Central Richmond, this is regardless of a specific time period.

But it’s equally important to pay attention to the technicals within the marketplace…

Looking only at the Inner Richmond district, below are the numbers for days on the market & premium selling price compared to listing:

What the above data indicates is:

·        Regardless of bedroom count, properties are selling within their long-term 40 day turnover rate.
·        Premium prices, too, are persisting once again: indicating that sellers have been able to command and obtain prices that they are seeking.
·        Three-bedroom properties (red line) in particular show the most stable, gradual movements over time: this is primarily due to these homes persistently making up the majority of sales. Therefore, the data seen on the 3-room options are one of the best proxies to use when studying the Richmond, at large.

Again, everything above is a technical understanding of who are the buyers and sellers within the San Francisco real estate marketplace. Fundamentally, as we have discussed in the past, there are very real economic and demographic justifications behind these numbers. Until next time.