On the heels of record setting gains in April, home and condo values in San Francisco continued to rise in May. According to the latest S&P/Case-Shiller Home Price Index, single-family home prices in the San Francisco MSA rose 4.3% from April to May 2013. Up 24.5% year-over-year, the San Francisco Index remains 22.9% below a May 2006 peak.
For the broader 10-City composite (CSXR), home values gained 2.5% from April to May and are up 11.8% year-over-year but remain 25.0% below a June 2006 peak.

Two cities set new highs, surpassing their pre-crisis levels and five cities – Atlanta, Chicago, San Diego, San Francisco and Seattle – posted monthly gains of over three percent, also a first time event.

The Southwest and the West saw the strongest year-over-year gains as San Francisco home prices rose 24.5% followed by Las Vegas (+23.3%) and Phoenix (+20.6%). New York (+3.3%), Cleveland (+3.4%) and Washington DC (+6.5%) were the weakest.

Monthly numbers before seasonal adjustment showed all 20 cities experienced rising prices. San Francisco (+4.3%), Chicago (+3.7%) and Atlanta (+3.4%) were the leaders. However, two cities – Cleveland and Minneapolis were down slightly after seasonal adjustment.

On a month-over-month basis, prices jumped across all three San Francisco price tiers.
The bottom third (under $438,712 at the time of acquisition) gained 5.1% from April to May (up 33.6% YOY); the middle third gained 4.2% from April to May (up 27.2% YOY); and the top third (over $760,236 at the time of acquisition) gained 3.7% from April to May, up 17.2% year-over-year versus 16.4% in April.
According to the Index, single-family home values for the bottom third of the market in the San Francisco MSA are back above May 2002 levels (46% below an August 2006 peak); the middle third is back near May 2004 levels (23% below a May 2006 peak); and the top third is back to March 2005 levels (10% below an August 2007 peak).
Condo values in the San Francisco MSA rose 3.1% from April to May 2013 and are up 27.6% year-over-year but remain 11.4% below a December 2005 peak.
Our standard SocketSite S&P/Case-Shiller footnote: The S&P/Case-Shiller home price indices include San Francisco, San Mateo, Marin, Contra Costa, and Alameda in the “San Francisco” index (i.e., greater MSA) and are imperfect in factoring out changes in property values due to improvements versus appreciation (although they try their best).
Home Prices Continue to Increase in May [Standard & Poor’s]
San Francisco Posts Record Monthly Home Price Gain [SocketSite]

38 thoughts on “San Francisco Home Values Gain At Near Record Pace”
  1. Bubble? Maybe from now on, yes. But the last ramp-up is a typical post-crash catch-up, though I am surprised, along with many I suppose, about the intensity of the catch-up.

  2. From ’87 to ’01 all three tiers were even. And then there was the great divide led by the bottom tier. That is, the bottom tier got significantly frothy and into a full blown bubble. Fueled by many factors discussed ad nauseam the reckoning (peak) came in mid-06 for the lower tier, mid-07 for the middle, mid-08 for the top; with a bottoming between mid-09 and early ’11 across all tiers. The chart shows this pretty clearly. It doesn’t quite show as clearly the true top tier in Prime SF, which is more accurately displayed by other “indexes” in the city.
    What the graph shows now is that all the tiers are in fairly close step with no one tier dramatically outpacing the others. This is the trend I’m watching. I do wish that CS had a $1M+ range as I would bet that this “tier” is performing very very well.
    I’m curious to see how history will reflect on this period of time. This current level could be sustainable in the long run but it does feel that we’re entering into a era of froth. I wouldn’t want to be buying into this market unless I had a ten year outlook. I’ve seen a few properties sit a bit longer than they would have in the past. I still think the market will go sideways. But I also think we could continue to easily rise into a bubble.

  3. Yes, the lower tier did see a much bigger bubble. History will put this back into the context of the continued impoverishment of the lower tier of the population.
    What has happened these last 30 years is a diversion of the dividends of growth from wages to investment returns. The effect on the middle class (who have access to stocks) were not as dire as on the month-to-month lower class, because almost all their earnings are wages.
    To alleviate the effects of this impoverishment, the poor were given easy access to debt, with the publicized hope they’d create their own opportunities and extract themselves from their current dead end. Both Dems and Reps are to blame. Some would say the poor were swamped with easy debt for the sake of keeping them satiated. At least until the music stopped.

  4. I don’t really think we are in bubble territory yet, although if things keep climbing at this pace we soon will be.
    Part of it is a the rise off the bottom, starting in the beginning of 2012, much like the stock market did in 2009. After a big drop, markets tend to shoot up for a little while.
    I also think the numbers are a bit over-optimistic due to a change in mix. Distressed properties were making up a much larger part of the market, particularly at the lower levels, but are not nearly as much of a factor today. CS may do some correction for this, but I don’t know the details of their methodology.
    I also think the dropping interest rates helped pump demand, as people who couldn’t afford to buy were brought into the market as interest rates continued down. Now that they seem to have flattened I think this effect will be reduced.
    I think prices nationwide and in SF still have room to grow, as it is still cheaper to buy than rent, but it’s getting closer to parity, so I do think (and hope) price growth will slow.

  5. “I don’t really think we are in bubble territory yet, although if things keep climbing at this pace we soon will be.”
    We’re never in “bubble territory” until after the crash. Then, every claims that they knew all along that we were in a bubble.
    The obfuscation, denial, and spin by the beneficiaries of the bubble are to be expected.

  6. I fully expect, and welcome, the bear crowd to re-grace us with their presence as this bubble continues to inflate.
    Also, I was checking the CS chart from 2008 and I noticed the parameters for the tiers have changed over the years. Not sure how (or if) that skews the data. Interesting, thought I’d point it out.

  7. and then there’s people who see any uptrend as a bubble, regardless of how many data points support it as growth based on fundamentals. Then 10 years later when it turns down they say “see I was right”

  8. and then there’s people who embrace blissful ignorance of the fact the 85 billion dollars a month are being whistled up out of nowhere and used to purchase MBS. Turn that off and see how your “fundamentals” fare.

  9. Well, the MBS purchases will come to an end one day. But this will come at a time when growth will be more self-sustainable nationwide. When that happens, interest rates will certainly be higher, which means rate chasers will switch back to investing into MBS, taking the place of the Fed.
    What would be good news for the sustainability of RE prices would be an improvement on the income side, which is what prices should be pegged to, all things being equal. Instead we have to make mortgages extremely cheap. The proof of that theory is in the pudding so to say: if SF is much healthier than its peers, it’s essentially due to the high level of wealth and income of the buyer base.

  10. One comment about the graph.
    I understand the convenience of setting the “100” for all Metro areas at 1/1/2000, but this distorts the relative health of SF vs its peers. The 2000 year was atypical for SF, due to the dot-com boom. RE prices shot up between 1996 and 2000 much more intensely than LA or NY.
    Had the graph been pegged at 100 on 1/1/1995, SF would probably be higher than all other metros.

  11. “Turn that off and see how your “fundamentals” fare.”
    True, but it’s not going to be turned off any time soon. I’m no fan of what’s going on at the fed, but the real bubble is in bonds and education lending. RE loans are still tough to get.
    It’s pretty simple: when buying is cheaper than renting, we’re not in a bubble.
    If interest rates go up significantly, or rents drop significantly, then I would expect prices to react. If they continued to go up in that scenario then I would call it a bubble.
    But that is not the case now, so I say it’s not a bubble. Prices can go up without it being a bubble.

  12. lyqwyd,
    I have read you saying a few times now that buying was cheaper than renting. Can you elaborate?
    Say you buy a new-ish 2/2 1000sf condo for 800K that you can rent out for $4000/month. How would the math work in the favor of buying?
    Down: 160K
    Mortgage: 640K @4.5% for 30 years = $3240 and change
    HOA: $500 / month
    Property taxes: $800/month
    We’re already at $4500/month without special assessments, opportunity costs, extra fees, and of course tax breaks.
    For houses, the math works even less. Don’t you agree?

  13. lol, one must subtract from the $4500 mortgage interest and property tax deductions, and the portion of the mortgage payment that is enforced savings rather than the expense of paying interest.
    There is opportunity cost on the down payment and portion of the the mortgage payment going to principal, but there also is some inflation in property values over time. So it’s complicated.
    Plus, it may be difficult to find that newish 2/2 for only $4000/month.

  14. There are two things that matter in computing ownership cost:
    1. Income statement (ie your monthly cash outlay).
    2. Balance sheet (ie principal repayment).
    They both count.

  15. True, the Principal payment will be $840 the first month. Tax credits might add a good $500/month.
    Wow. It is indeed cheaper to buy if costs are kept low enough. I take my comment back. This is a crazy rental market.

  16. I would assume that nearly anyone who can afford to purchase a house (as opposed to a $800k condo) in the SF market based on income (versus accumulated/inherited wealth or a one-time windfall) will fall well within the ATM and will not get any property tax deduction.

  17. “I would assume that nearly anyone who can afford to purchase a house (as opposed to a $800k condo) in the SF market based on income (versus accumulated/inherited wealth or a one-time windfall) will fall well within the ATM and will not get any property tax deduction.”
    True for us. And though it’s actually the AMT, it certainly feels like an ATM.

  18. My wife and I have a million dollar plus flat in SF. We are hit by the AMT every year, but it does not completely wipe away all tax-based savings. The amount will differ based on individual circumstances, etc.

  19. @shza, not entirely true. My wife and I lose some of the advantage to AMT, but still get most of it.
    Also, SFH homes rent at quite a premium, right now I could probably rent my house for more than my monthly payment, without considering principle payment or tax advantages.

  20. lyqwyd,
    It depends on when you purchased and how much down payment you purchased with.
    But I agree that most current owners in SF are probably sitting pretty rental-wise. I purchased in 2010 at what I considered a very low price at the time and with 1/2 down. The rental value is roughly twice my mortgage+PTaxes+HOA, not including added income taxes. No, I am not making it up. Of course this can be monetized only if I am not in the place. I have started doing airbnb when I am overseas (a few months a year) and sometimes I feel coming back is a poor financial decision 😉
    Good problems to have, actually!

  21. @lol
    Very true. I purchased in late 2011 with 3.5% down, refinanced late last year (after remodeling) with 15% equity, and I’m quite sure I’m now well over 20% equity.
    It’s not like I’d be making big money if I did rent it, and as you point out I’d have to be living somewhere else to take advantage of it.

  22. “It’s pretty simple: when buying is cheaper than renting, we’re not in a bubble.”
    Yes it is pretty simple: when buying is cheaper than renting because the fed is flooding the market with funny money, we are in a bubble.

  23. “”It’s pretty simple: when buying is cheaper than renting, we’re not in a bubble.”
    Yes it is pretty simple: when buying is cheaper than renting because the fed is flooding the market with funny money, we are in a bubble.”
    Diemos, when are you expecting to see the 50% off everything in The City you predicted?

  24. It’s only a bubble if it pops and you sell down. Looking at the top tier relative to today we were in a bubble from 05-08. Bottom tier was in a bubble back to ~2002. Generally speaking, other than the bottom tier, if you bought and held for ten years and managed your financing properly you would more than likely show some meaningful appreciation on your home.
    Always a risk to buying. Longer hold, lower risk. Ten years is a safe bet. Every year under 10 I’d say the risk goes us. Under 5 is crazy in these times.

  25. In my opinion it’s a bubble when the main thing driving up prices is the fact that prices have been rising. People just buying on momentum and lenders lending based on momentum. The last run up was clearly a bubble.
    Diemos has a point about looking at the aftermath though. You can’t just look at the price chart without considering the bailout money. If you lose all your money on a failed business venture and your rich uncle bails you out, that doesn’t make you a business genius.
    I think that low rates and low supply are driving prices now. The low rates and high prices are spurring new construction which might cause prices to drop in the future. But I don’t call that a bubble, partly thats how markets should work. Low supply drives up prices which is a signal to increase supply. The low rate part is more dicy. The market reacted very sharply to the fed even mentioning the taper which is a pretty clear indication that rates wouldn’t be nearly this low without fed support.

  26. I purchased a house on the Peninsula and sold it after a 24-hour hold for a net 16% gain. That represented a 80% profit cash-on-cash due to leverage afforded by the banks.
    I think that potential is what is driving prices more than anything.

  27. ^ I hate to say it, but thats exactly what I consider bubble thinking.
    What you consider potential on a time frame that short I call momentum. The market being driven by highly leveraged short term momentum traders is classic bubble.
    If the market comes to be dominated by these types of transactions I’d call a bubble, but I don’t think we’re there right now.

  28. I agree with everything you said anon.
    One point of clarification though: nobody has said that the Fed’s actions do not have an impact on prices. In fact a few have specifically agreed. I think the difference of opinion is whether we are currently in a bubble.

  29. Well, for one thing inflation is still in the sub-2%. If inflation was in the 2-4% territory the Fed would be pressured to change its stance. Right now, the inflationistas are proven wrong.
    Rates would have gone through the roof due to fear of risk if the Fed hadn’t intervened. It is normal for the Gov to step in during times of crisis, even though sustaining RE is not the most balanced way to help an economy.
    Banks today are happy with collecting the fruits of the pick up in RE without bearing the actual risk. They’re hooked on the cheap profits. Then again, Fanny and Freddy (aka taxpayers) are also booking incredible profits. Not too bad, Benny…

  30. You cannot call Jimmy’s example momentum as opposed to potential without knowing anything about the specific property. It might have been bursting with potential, and Jimmy didn’t ahare how it was acquired.

  31. @lyqwyd – I agree that other people have called out that low rates are influencing prices. My point was only that the true aftermath of the bubble is seen both in the price chart and in the costs to keeping prices where they are.
    But while I do think that low rates are helping keep prices up (and helping the banks) I don’t think that either of these are the main policy reasons that are driving the fed’s actions. I think the main driver is employment. Construction employment took a big hit after the bubble burst and by law the fed is required to target employment as well as rates. Higher prices and lower financing costs due to low rates both spur construction which then increases construction employment.

  32. @anon
    I agree it isn’t the Fed’s goal to increase housing prices, but I disagree it’s not their goal to benefit the banks.
    While it’s part of the Fed’s mandate to keep stable employment, it’s not all that realistic as they don’t really have the tools to safely control employment. This can largely be seen by the high unemployment rate years after they’ve used all their normal tools, as well as a number of experimental ones.
    Monetary policy is not a very good tool when it comes to managing employment.

  33. ^ congress and the Guv are on opposite sides of the alley. This is why very little is being done in DC to actively reduce unemployment. Even the opposite is being done with this idiotic sequester. The last resort is the RE market-distorting fed moves. The guv is being given a water pistol and they are trying to drown the enemy with it…
    Maybe this could change in 2014 if Congress goes Dem. But that would be a bit too late in the game.

  34. They are not being given a water pistol, they gave themselves a water pistol. They have the power, they are choosing to squander it. Both parties are responsible.

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