2022: July San Francisco Real Estate Insider
Hello and I hope you had a great Fourth of July holiday! As we enter the second half of the year, the housing market, albeit a major economic engine, seems to be fading out of the limelight as the focus of the (media) attention skews towards the big picture – inflation, possible recession, employment and the stock market. No doubt the current economic picture is a concern to everyone. Nobody likes to pay $150 to fill their vehicle with gas, be worried about a possible job lay off (or lay off employees), or watch their retirement portfolio drop by 20%. The housing market clearly fits into this bigger picture, but clients don’t generally care (about the housing market movements) unless they plan on buying, selling or refinancing in the immediate to midterm.
The Fed has definitely used its toolbox – as they said they would do – to slow inflation. The housing market has clearly slowed as a result. Even at a local level, the market has slowed. But, it’s slowed from a hyper active market to an active market. We may still experience some more slackening, but I am still bullish on our micro-market here in San Francisco. We will get into market specifics later.
As far as housing, I read an article that surveyed a group of top 100 to 150 economists as it relates to the national housing market. Of the economists surveyed, participants expect on average 4.8% appreciation per year over the next five years. Cumulatively, they expect over 26% appreciation. On the question regarding “housing currently being in a bubble:” 65% said “no,” 35% said “yes.” From my perspective, 4.8% a year sounds like a pretty good return.
In the short term, what are my biggest concerns as it relates to the local housing market? Interest rates, layoffs, return to office and consumer confidence. Interest rates will most likely continue to climb. I doubt the Fed currently see’s any reason to take their foot off the gas. The clarity on layoffs and return to the office are still a bit unclear (as to the extent of possible job loss numbers), but layoffs are happening. As we enter recessionary waters and employees fear a possible layoff, employers will have the leverage to get employees back to the office. Of course, some employers may prefer a remote workforce, but, employee’s back in the office has proven to be a benefit to the housing market. As far as confidence, the local market is currently suffering from a lack of overall buyer confidence and optimism; mostly in the sub $3m market (where interest rates hikes kill off affordability quicker than more affluent buyers). In speaking with buyers, sellers and others that are engaged in the market, it all seems to add up to pessimistic psychology. I will say the media drum of doom and gloom can get depressing.
Enough of the big picture. Let’s take a look at the local real estate market. As referenced, San Francisco as a whole has slowed. However, specific neighborhoods are still performing very well. Buyers are still aggressively pursuing move-in ready houses. If a home has a few issues and the price does not reflect those issues, it will sit.
So how is the city market performing? The sale-to-list ratio (the final sale price divided by the last list price expressed as a percentage) shows the average sale price is still over the asking price. But, the trend is clearly moving back down.
As mentioned, pricing is key during uncertain times. The chart below shows the increasing percentage of properties that received a price reduction. As we move through the second half of the year, I’d expect that percentage to stay fairly steady as pricing gets more realistic (and the “marketing price” which is artificially low is no longer a realistic strategy). If sellers have to compete for buyers, they generally do not want to shoot themselves in the foot with unrealistic pricing.
Speaking of price reductions, the below chart shows the trend of reductions for San Francisco single family homes and condos over the past few months. Keep in mind this is citywide and specific neighborhoods trend much better than others. But, the monthly increase speaks volumes.
