Welcome to our May newsletter. In this month’s issue we spotlight:

• Bay Area home prices drop for the first time in seven years
• Updates on the Pinterest, Lyft, and Uber IPOs
• Market trends for the San Francisco housing market

Bay Area home prices see slight decline for the first time in seven years

There is a tale of two cities happening in the San Francisco headlines this month. The first one is the overall softness in the market that we have seen over the last year culminating this month in a newsworthy statistic: CoreLogic released its home sales report this month, and Bay Area home prices declined on a year-over-year basis for the first time in seven years, dating back to 2012.

It is important to note that the decline was not significant, dropping only .1 percent, but after years of price growth, we are finally seeing a cooling year-over-year.

Year-over-year, rather than month-over-month comparisons, show longer term trends whereas month-over-month tend to have greater variation. Annual comparisons remove changes due to seasonality and the time of year. By this annual measure, and looking at the 12-month rolling average over the last ten years below, we can clearly see the price declines highlighted by CoreLogic’s report.

This snaps a seven-year streak of consistent growth in home prices. This is visible looking at the 12-month rolling average chart above.

Analyzing data from the California Association of Realtors, we see that San Francisco recorded a year-over-year price change of negative 2 percent in March, down to roughly $1.63 million.

Price declines like this, as opposed to the consistent price growth we have seen over the last seven years, signals a more buyer friendly market, meaning, buyers will have more bargaining power than when home prices were headed consistently upwards.

One reason for buyers to welcome a cooling market is basic affordability. Based on the median price of a single family home in San Francisco, here is a look at the average income it would take to afford one.

Making an annual income of $274,667 not only puts you in a median home in San Francisco, but it also puts you in the top 5 percent of all income earners in the country (source: Social Security Administration wage statistics).

There are plenty of would-be buyers who would like to see a little cool down. Last year at this time, San Francisco home values were up a meteoric 25 percent year-over-year. Everyone should be happy with this month’s news for one reason: sustained price gains of that magnitude cannot go on forever. Home values tend to correlate with the steadier pace of wage growth over time. A soft landing and a more balanced market is far more desirable than the correction we saw take place in 2007 to 2009 when home prices dropped nationally by 32 percent.

We compiled below a consolidated view of the most important trends to track in the San Francisco market compared to a year ago.

Based on these annual comparisons, we see a broader shift towards a more friendly buyers market:

• The average square foot price is down 1 percent
• Sold listings are down 11 percent
• Less homes were sold over their list price

Consider this cooling a signal there is no impending correction in the housing market. Things are more healthy and balanced than they were a year ago. On an annual measure, at least, buyers can finally take a small sigh of relief.

Update on the San Francisco IPOs

The second headline story this month runs contrary to the cooling market data we analyzed above: the Bay Area’s IPO season and the cash infusion it is creating throughout San Francisco real estate.

Shares of the digital scrapbooking site Pinterest rose more than 28% in their public debut on April 18th on the New York Stock Exchange. The San Francisco-based company’s stock, trading under the symbol “PINS,” closed at $24.40, up $5.40 from the IPO price of $19 each. As of May 17th, it is priced at $26 and went as high as $34 on April 29th.

This looks healthy for the IPO market, especially with Lyft share prices stagnating about 15 percent lower than its IPO price of $72. As of May 17th, it is priced at $53.

While year-over-year comparisons show San Francisco prices decreasing for the first time in seven years, the market is heating up notably on a month-to-month basis. Simply put, the market is coming out of a slump that started in mid-2018 when interest rates began to rise as high as 5 percent.

We take a look at the charts below to look at the monthly median home price movements over the last three years for both single family homes and condos.

Home prices appreciated 9 percent as compared to the previous month. They have not appreciated that quickly since February of 2018, over a year ago. Condo prices appreciated 8 percent faster than any time since March of 2018.

To get a broader look of month-over-month changes as compared to the year-over-year changes, let’s look at the chart below.

Comparing the March numbers month-over-month:

• Median prices rose 9 percent
• Price per square foot rose 3 percent
• Sales rose significantly by 55 percent
• Days on market decreased by 7 percent

The monthly data shows that things are heating up again as home values are already getting a lift from lowered interest rates and the anticipated wealth created by the IPOs. It may also be driving some buyers to close on a home ahead of the vesting periods for the tech employees.

In March the New York Times reported on an IPO phenomenon that could take place in the San Francisco market: homeowners waiting to list their home until after the IPO’s have minted thousands of new millionaires who all want a new place to live. That may all be speculation though our March data does show new listings plummeted 27 percent for single family homes and 20 percent for condos.

The steep decline in the number of new homes being put up for sale has had a big impact on the number of Active Listings on the market.

Active listings is one of the most important measures of how buyer or seller friendly a market is. More homes mean less competition, lower prices, and sellers receiving lower offers at a slower rate. Conversely, less homes on the market mean more competition for buyers, higher prices, and sellers receiving better offers at a faster rate.

Active listings for March are down 2 percent from a year ago for single family homes and down 9 percent for condos.

On a month-over-month comparison, active listings usually rise seasonally in March through the summer months. However, active listings for single family homes were down month-over-month 8 percent and condos were down 10 percent.

Conclusion

Measured annually, the San Francisco real estate market has cooled, and it is our opinion this is welcome news.

Welcome because it sets the best stage for the IPO season that is upon us. San Francisco real estate market must handle an influx of wealth without becoming unsustainably overheated.

Welcome because it points to a healthy and sustainable real estate market where buyers and sellers alike should not expect any sort of major correction.

For buyers, it’s prudent to look at purchasing a home before home prices rise. Interest rates are low and a cooler market gives you more bargaining power.

For sellers, the IPOs this season move an otherwise cooling market much more in your favor. It is an exciting time to take a look at selling your home.

As always, if you have any questions about the insights above or need help navigating the local market, please contact us!