Wealth, Employment, Demand, Inventory, Affordability and San Francisco Home Prices

Two of the biggest drivers of local real estate demand in recent years have been increasing employment and new wealth creation, both of which exploded in San Francisco and the Bay Area. Approximately 600,000 new Bay Area jobs and 100,000 SF jobs have been added in the past 6 years. IPOs, unicorns and surging stock valuations created thousands of millionaires, dozens of billionaires and trillions of dollars in new wealth. The S&P 500 roughly doubled in the 5 years to mid-2015. Interest rates plummeted. And there was an exuberant optimism that the boom would only continue to soar. Add those ingredients to a deeply inadequate supply of housing and the result is a real estate market boiling over, with skyrocketing home prices and rents

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Chart: Long-term SF Rent Trends

Two of the biggest drivers of local real estate demand in recent years have been increasing employment and new wealth creation, both of which exploded in San Francisco and the Bay Area. Approximately 600,000 new Bay Area jobs and 100,000 SF jobs have been added in the past 6 years. IPOs, unicorns and surging stock valuations created thousands of millionaires, dozens of billionaires and trillions of dollars in new wealth. The S&P 500 roughly doubled in the 5 years to mid-2015. Interest rates plummeted. And there was an exuberant optimism that the boom would only continue to soar. Add those ingredients to a deeply inadequate supply of housing and the result is a real estate market boiling over, with skyrocketing home prices and rents.

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Market Transition, Lull or Short-Term Fluctuation?

But in mid-2015, fears regarding the world economy burgeoned; Bay Area IPOs started to dry up, (over 80 in 2013 to mid-2015; 1 so far in 2016); the valuations of many high-profile IPOs and unicorns declined; and the firehose of venture capital investment slackened. The S&P 500 is now flat year over year and housing affordability has dropped close to historic lows. Hiring slowed and then in early 2016, employment numbers started to decline a little in San Francisco. Some of the wild exuberance leaked out of the general economic optimism, and in the city, demand began to soften a little, while listing inventory started to tick up.

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Chart: Long-term SF Employment Trends

In the first 4 months of 2016, after 6 years of heated growth, the trend in increasing employment numbers in San Francisco reversed itself. This aligns with stories of local start-ups starting to slow hiring and trim staff as venture capitalists have become more demanding. However, this change in hiring could be a short-term phenomenon.

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Since 2012, the spring selling season has been the most dynamic period of median home price appreciation. In spring 2016, after years of major increases, year-over-year house and condo price appreciation basically plateaued.

Note: Virtually every time the analysis is changed even slightly, the result will change. The combined house-condo median sales price ($1,280,000) was 5% higher year-over-year, still way down from its 23% jump seen in 2015. Median sales prices can be and often are affected by other factors besides changes in fair market value.

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In 2016, the supply and demand dynamic shifted somewhat, with the number of listings available to purchase increasing, but the number of closed sales declining. (There was also a significant increase in listings expiring or being withdrawn from the market without selling, an indication of sellers demanding more than buyers were willing to pay.)

Slowing or plateauing appreciation does not imply a crash, and the cooling of a desperately overheated market to something closer to normal is not bad news. Indeed, an improvement in housing affordability (and supply) would be good news, both socially and economically. Likewise, a shift from irrational exuberance in the local economy to rational optimism would be a healthy change.

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San Francisco Luxury Home Market

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As mentioned in previous reports, it appears the luxury segment has softened to a greater degree than more affordable segments (some of which remain very competitive): The number of high-end listings in MLS has jumped, while sales have plateaued or declined. Why the more dramatic change in the luxury condo market? Firstly, increased competition from new, big, luxury-condo projects may be taking a toll (more supply). Secondly, a significant percentage of these very expensive units are usually purchased as second or third homes, not primary residences: When economic uncertainty swells, this is a market segment often affected first (less demand). Note: We do not have access to up-to-date statistics on new-project, luxury condo sales activity, so do not know if that segment has also cooled or is simply cannibalizing the resale market illustrated above.

Based on preliminary data, it appears that accepted-offer activity in May for luxury houses was very strong, possibly even exceeding levels of Spring 2015, suggesting that buyers took advantage of the greater selection of listings to jump in. If so, this will show up in the sales data for June.

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Rental Market Trends

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The rental market is especially sensitive to changes in hiring, and, as illustrated above, asking-rent appreciation has plateaued. It is quite possible that actual lease rents have already started to decline, though no decline has yet shown up in the above statistics. (There is no MLS for reporting actual rents paid, so we have to rely on advertised asking-rent data, which is a lagging indicator.) Clearly, available apartment inventory has grown, and renter demand has softened. Large new apartment buildings have been entering the SF market, with more in the pipeline. This quote is from a June 1 Bloomberg article: Softening apartment rents in New York and San Francisco have forced landlord Equity Residential to lower its revenue forecast for the second time this year, as newly signed leases are not meeting company expectations.

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Important Caveats & Perspective

This recent data measures relatively short-term changes and may reflect only a temporary economic lull or market fluctuation (which is not uncommon). Also, different neighborhoods, property types and price segments in San Francisco are experiencing varying market conditions, from still-quite-hot (non-luxury houses) to cooler (luxury condos).

A staggering amount of wealth yet remains in the Bay Area. Hundreds of local companies worth hundreds of billions of dollars, including the likes of Uber, Airbnb, Palantir and Pinterest, remain in the near-future, possible-IPO pipeline, and economic optimism can shift quickly. Our business environment continues to be the envy of the world, and unemployment rates persist at near-historic lows. San Francisco ranks with the greatest cities of the world in quality of life, even if stressed by growth and housing-affordability issues. Overall city and Bay Area housing supply remains acutely inadequate to recent population increases.

Compared to almost any other in the country, our real estate market remains quite strong as measured by a wide variety of standard supply and demand statistics, and a substantial percentage of San Francisco home listings still sells quickly for well over asking price.

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Advice for Buyers

Buy a home that is affordable now and in the foreseeable future, keeping an appropriate reserve for the unexpected. Buying for the longer term is usually safer than for the shorter term. Lock in a low, fixed, interest rate for an extended period. Expand the list of neighborhoods you are willing to consider and do not just run after brand new listings, but look at those the market has passed by: There will often good buying opportunities with greater room to negotiate. Do not be afraid to make offers below asking price and to negotiate, but carefully review the most recent comparable sales and market indicators. During the summer and mid-winter holiday seasons, the competition for listings significantly declines, and can be excellent times to buy. Be patient: New homes come on the market every day.

Historically, homeownership in the Bay Area has been a good investment, because of long-term appreciation trends, the advantages of leverage, what is called the forced-savings effect (each mortgage payment including principal pay-down), and the many tax advantages. Talk to your accountant or financial planner regarding how these factors might impact you specifically. Admittedly, if one has to sell at the bottom of a down cycle, it can be painful.

Advice for Sellers

There are still plenty of motivated, qualified homebuyers in San Francisco, but do not take for granted that mobs of desperate buyers will show up waving over-asking offers. Price your home correctly right from the moment of going on market as overpricing can have significant negative ramifications. Prepare your home to show in its best possible light: You only have one chance to make the right impression on buyers. Hire an agent who will implement a full-court marketing plan to reach every possible prospective buyer and seize their attention. Stay up to date on comparable listings and sales, market conditions and trends, and adjust appropriately. If you receive an unacceptable offer, do not be insulted: It almost always makes more sense to issue a counter offer instead of outright rejection.

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San Francisco Housing Inventory & New Home Construction

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Above are 2 charts from our updated report which contains a great deal of additional information: SF Housing Inventory & Construction Report

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. It is not our intent to convince you of a particular position, but to attempt to provide straightforward data and analysis, so you can make your own informed decisions. Statistics are generalities, longer term trends are much more meaningful than short-term, and we will always know more about what’s actually going on in the present, in the future. New construction condos not listed or sold on MLS are not counted in these statistics, though they often affect market dynamics.

© 2016 Paragon Real Estate Group


Midway through the Spring 2016 Selling Season

San Francisco Median Home Price Appreciation
Short-Term & Long-Term Trends

As seen in the first chart below, the combined house-condo median sales price hit a new high in April. However, as the second chart illustrates, so far this year, while median house prices continued to appreciate, condo and TIC prices appear to have generally plateaued. 2012-2015, spring was the most dynamic, high-demand/low-supply selling season of the year.

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Market Dynamics by Property Type & Price Segment

As mentioned in our April report, different segments of the market appear to be diverging. The below charts separate the San Francisco homes market into house and condo/co-op/TIC segments, then further subdivide each into 4 price segments. The lowest, most affordable, price segments are defined by the median sales prices for the first 4 months of the year. The highest price segments (or luxury home sectors) are defined, approximately, by the top 10% of sales.

Very generally speaking, the house market has remained hotter than the condo market, which appears to have cooled to some degree (but nothing remotely approximating a crash), and more affordable homes are seeing significantly more demand than luxury homes, where the pool of potential buyers is much smaller. The luxury condo market, in particular, may be being impacted by an increase in large, new, luxury-condo projects arriving on market, especially in those districts where they are mostly being built. The number of resale luxury condo listings in San Francisco hit an all-time high in April.

These analyses do not include new-project condo activity unreported to MLS, which is now a significant portion of the market: Unfortunately, our access to definitive data regarding current activity in new condo sales is limited.

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More on the luxury market: SF Luxury Home Market Analytics

Percentage Changes in Median Sales Prices
& Average Asking Rents, 1994 to Q1 2016

The first chart tracks year-over-year changes in annual median sales prices for San Francisco houses. The year of greatest percentage appreciation was 2000 at the height of the dotcom bubble (though on a dollar appreciation basis, recent years far exceeded earlier periods). This is a generalized overview: Homes in different neighborhoods and in different price segments often saw wide variations in annual appreciation rates.

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More on real estate cycles: 30+ Years of Bay Area Real Estate Cycles

This second chart illustrates appreciation in average asking rents. Note how much rents declined after the dotcom bubble ended, while the effect of the 2008 financial markets crash was much milder. We have heard from multiple city sources that available rental inventory has significantly increased and renter demand significantly decreased in recent months, which may reflect a possible softening in new, high-tech hiring. We shall see if this begins to show up more definitively in upcoming rent and employment statistics. Or it may simply be a temporary lull in the market.

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More on SF & Bay Area Rents: Rent Trends Report

Our Q1 report on the apartment building market: Bay Area Apartment Market

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. Statistics are generalities and all numbers should be considered approximate. New construction condos not listed or sold on MLS are not counted in these statistics, though they often affect market dynamics. Sales statistics of one month generally reflect offers negotiated 4 to 6 weeks earlier. Last but not least, different analytical systems sometime calculate standard real estate statistics differently, which can deliver variable results.

© 2016 Paragon Real Estate Group


San Francisco House & Condo Markets Diverge

In the first quarter of 2016, various market segments in the city began to trend in significantly different directions. Houses, especially those below $2 million, are still often selling in a frenzy of bidding: Recent reports of houses selling with 5, 10 or more competing offers are not uncommon, especially in neighborhoods considered more affordable (by San Francisco standards). Demand remains very high, supply remains extremely low, and new house construction is virtually nil.

However, thousands of new-construction condos have hit the market in recent years or are arriving shortly, with many thousands more in the 5-year pipeline. In recent years, the new supply added to the usual resale-condo inventory still did not keep up with demand, but that seems to be shifting, especially at the more expensive end of the condo market. As of early April, the number of condo listings actively for sale in MLS is up over 40% year over year, and that does not include most of the new-construction condo units hitting the market (not listed in MLS).

This does not mean that condos are not selling, because many are at top prices. But the demand-per-listing ratio is declining, multiple offers are less common, and more listings are expiring without being sold. This particularly appears to be the case in those neighborhoods where most of the new construction projects are concentrated, and, again, the luxury-condo segment appears to be most affected. Apparently, the developer rush to build large projects of very expensive condos, possibly outpacing long-term demand for such units, is also playing out in Manhattan (where admittedly luxury condos are much more expensive).

It is unclear at this point whether new condo projects themselves are being affected in their rate of sales or sales prices. These condos often go into contract during the construction phase, long before sales actually close, and access to information during that period is very limited. There can be no doubt that they comprise serious competition to resale condos in the areas they’re being built.

Please note: The data of one quarter is not definitive and Q1 was a very volatile period for the financial markets, which may have had a short-term effect that might now shift. SF is also a city of micro-markets, so what applies in one district may not apply in another. Q2, just beginning, is typically the busiest of the year, and market trends will become much clearer in coming months. Last but not least, in real estate, what we see today generally reflects the market 4 to 8 weeks ago due to the gap between listings coming on market, offers being negotiated, and sales finally closing escrow.

Market Supply & Demand Trends
by Property Type and Price Segment

It should be noted that some of the Q1 2016 MLS statistics shown below, which appear to illustrate a cooling of certain market segments in San Francisco, would in most other areas of the country often be considered signs of crazy-hot markets.

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An astonishing 84% of Q1 2016 SF house sales under $2 million sold for over asking price, a very small decline from the most active quarters of last year. The percentage for more expensive houses is 16 percentage points lower than less expensive houses, but still above Q1 2015. Condos, also shown in two price segments, have lower percentages than any time in the past 4 quarters. We shall see if those percentages rebound in Q2, as usually occurs once the spring season warms up, or whether increased inventory dampens overbidding going forward.

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The same trends seen in the first chart above apply to this illustration of the median percentage of sales price over list price over the past 5 quarters. For houses under $2 million, the median percentage over asking price remains incredibly high at 12%, a clear sign of feverish competition between buyers. In contrast, luxury condos overall sold just a tiny bit above list price (less than one half of one percent), and in those districts seeing the most high-rise, luxury condo construction, the median sales price to list price percentage fell well below list price (not shown on chart). More supply means less competition and less sense of urgency in buyers; overbidding becomes rarer and buyers negotiate more aggressively.

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Perhaps nothing is more indicative of a cooling market than increasing numbers of listings expiring and being withdrawn from the market without selling. Q1 2016 saw big jumps in expired/withdrawn condo listings over the first quarters of the previous 3 years. Many such listings end up coming back on the market at lower prices.

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Again, houses under $2 million have maintained a very high level of listings going into contract on a monthly basis. High percentages of this statistic keep inventory low even when increased inventory starts coming on market, analogous to putting food in front of a very fast, hungry eater. However, if a low percentage of listings accepting offers is coupled with increasing numbers of new listings, inventory starts mounting quickly, because more unsold listings from previous months get added on top of the additional new listings streaming onto the market. The slow-eating diner is outpaced by the delivery of new courses, and the table fills up with uneaten food.

San Francisco Median Home Sales Prices
House & Condo, by Quarter

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Chart: Median Price Trends since 1993

So far, any market cooling that has occurred is not showing up in Q1 median sales prices: Median prices for both houses and condos remain close to the high points hit in spring 2015. However, for the first time in 4 years, condo median prices did notjump in the first quarter of the year, though neither was there any significant decline.2012 to 2015, overheated spring selling seasons of very high demand and deeply inadequate supplies of homes for sale have fueled most of the home-price appreciation occurring each year in San Francisco. We shall soon know whether this trend will continue this spring, or whether the median prices of some market segments will finally plateau, or even adjust downward with changing supply and demand dynamics.

Employment Statistics

Perhaps nothing underpins an appreciating real estate market more than increasing numbers of people moving into an area to take new jobs, especially well paid ones. These charts illustrate the recent explosion of employment in San Francisco and the Bay Area. Of course, employment trends can slow or even reverse directions as occurred after the dotcom bubble burst. It is interesting to note that SF employment (and rents) fell much more after the dotcom adjustment than after the 2008 financial markets crash. On the other hand, SF home prices only temporarily dipped in 2002, while dropping rapidly in late 2008/early 2009 and then remaining depressed until the recovery began in 2012.

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Chart: SF High-Tech Employment Trends

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Stock Markets & Interest Rates

After all the travail regarding the stock market volatility since last summer, it is now, as of early April, pretty much back to where it began. And interest rates have actually fallen since the Fed raised the benchmark rate in mid-December. These conditions are typically considered very positive for real estate markets, though both can be subject to sudden and significant change.

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Chart: Short-term Interest Rate Trends


Other recent reports you might find interesting:

San Francisco New-Housing Pipeline
San Francisco Neighborhood Affordability
Seasonality & Real Estate Markets
Bay Area Housing Affordability
S&P Case-Shiller Index for SF Metro Area

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. Statistics are generalities and all numbers should be considered approximate. New construction condos not listed or sold on MLS are not counted in these statistics, though they often affect market dynamics. Sales statistics of one month generally reflect offers negotiated 4 to 6 weeks earlier, thus a fair number of YTD 2016 sales reflect market activity in late 2015.

© 2016 Paragon Real Estate Group


San Francisco Median Condo Price Appreciation 2011 to 2015, by Neighborhood

Median sales price is a very general statistic, often concealing an enormous variety of values in the underlying individual sales. It can be and often is affected by other factors besides changes in fair market value, such as changes in the inventory available to purchase, and major changes in the distressed property, luxury home, or new condo construction segments. Sometimes median prices fluctuate without any great significance: substantially different groups of homes (larger, smaller, older, newer, etc.) simply sold in different periods. Assessing appreciation by changes in dollar per square foot values, instead of by median sales prices, can sometimes deliver significantly different appreciation rates.

Below the charts is a table with a more comprehensive list of San Francisco neighborhoods, and at the bottom of the page is a neighborhood map.

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The neighborhoods on the table below are grouped by San Francisco Realtor District, some of which contain neighborhoods of relatively similar values and some with highly variable home values.

Generally speaking, the higher the number of sales, the more reliable the statistics: We’ve usually calculated appreciation rates for neighborhoods with at least 24 sales in 2015, but these should still be considered very approximate.

An asterisk signifies a very low a number of annual sales and/or our suspicion that the appreciation calculation would not reflect market reality due to the variety of issues pertaining in the area. New, high-price condo projects can make sudden, dramatic impacts on neighborhood median sales prices in the year they go on market. In 2011, median sales prices in some areas were badly distorted by distressed property sales (bank and short sales) that didn’t represent fair market values. If either of these situations applies, the 4-year appreciation rate will jump higher in that neighborhood.

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We have also performed this analysis for San Francisco house values: San Francisco House Price Appreciation, 2011 to 2015

Our survey of the 2015 San Francisco real estate market: San Francisco Homes Market in 2015


San Francisco Median House Price Appreciation 2011 to 2015, by Neighborhood

Median sales price is a very general statistic, often concealing an enormous variety of values in the underlying individual sales. It can be and often is affected by other factors besides changes in fair market value, such as changes in the inventory available to purchase, and major changes in the distressed property, luxury home, or new home construction segments. Sometimes median prices fluctuate without any great significance: substantially different groups of homes (larger, smaller, older, newer, etc.) simply sold in different periods. Assessing appreciation by changes in dollar per square foot values, instead of by median sales prices, can sometimes deliver significantly different appreciation rates.

Below the charts is a table with a more comprehensive list of San Francisco neighborhoods, and at the bottom of the page is a neighborhood map.

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The neighborhoods on the table below are grouped by San Francisco Realtor District, some of which contain neighborhoods of relatively similar values and some with highly variable home values.

Generally speaking, the higher the number of sales, the more reliable the statistics: We’ve usually calculated appreciation rates for neighborhoods with at least 24 sales in 2015, but these should still be considered very approximate.

An asterisk signifies a very low a number of annual sales and/or our suspicion that the appreciation calculation would not reflect market reality due to the variety of issues pertaining in the area. In 2011, median sales prices in some areas, especially in the southern border neighborhoods of the city, were badly distorted by distressed property sales (bank and short sales) that didn’t represent fair market values. If this situation applies, the 4-year appreciation rate will jump higher in that neighborhood.

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We have also performed this analysis for San Francisco condo values: San Francisco Condo Price Appreciation, 2011 to 2015

Our survey of the 2015 San Francisco real estate market: San Francisco Homes Market in 2015


The San Francisco Real Estate Market in 2015

Architecture, views, probates, penthouses, lofts, TICs, luxury homes, mortgage rates, sales prices, market cycles, and everything else we could think of in a look back on 2015.

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Quarterly Median Price Chart & Monthly Case-Shiller Chart & Sales by Price Range Chart

Despite anxiety about interest rates, financial markets, housing affordability, unending international crises, and possibly over-valued, high-tech unicorns, the Q4 2015 San Francisco median house sales price, at $1,250,000, is up about 11% from Q4 2014. That dovetails nicely with the S&P Case-Shiller Home Price Index for the Bay Area, which measures appreciation in a different way, but also calculated 11% annual appreciation (through October, its last report). The Q4 condo median sales price, at $1,125,000, is up 13% year over year, but that is influenced by the greater percentage of more recently built, and more expensive, units in the sales mix.

We’ve also updated our popular price maps of San Francisco neighborhoods and the greater Bay Area: Home Price Maps

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San Francisco has seen 3 extended periods of home construction: The first ran from the Gold Rush to the 1906 earthquake, when 28,000 buildings were destroyed. The second went from the post-quake rebuilding, with the construction of thousands of Edwardian houses and multi-unit buildings, through the big WWII population surge. Many districts such as the Marina and Sunset/Parkside were built out in the period from 1920 to 1950, with Spanish Mediterranean (in many variations), Marina-style and Art Deco being common architectural styles.

The city’s population then went into major decline during the subsequent 3 decades and construction plunged. The third era of homebuilding is all about new condo construction, which began around 1980, ebbed and flowed dramatically with the economy, and is currently booming once again.

Early San Francisco Architecture

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A look at a few of the distinctive niches of the market.

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San Francisco is famously a city of gorgeous views. For the simple reason of verticality, more condos have views and, generally speaking, more panoramic and spectacular views, than houses. Many other lovely views add to SF home value as well: sweeping city views; park views; marina views; views of Alcatraz, Marin and Mt. Tamalpais; and of the East Bay and Mt. Diablo. A few lucky (typically, very affluent) condo owners have staggering vistas from the windows on all 4 sides of their high altitude units.

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After being bludgeoned in 2015 by thousands of articles, predictions and warnings regarding interest rates, here is a look at how much they actually changed over the course of the year: approximately one seventh of one percent. Per recent signals from the Fed, presumably mortgage rates will rise in 2016, but expectations over the last 6 years have been confounded far too often to be sure. Significant increases would certainly worsen the affordability equation for homebuyers financing their purchases.

10 Factors behind the San Francisco Market

Seasonality: Waiting for Spring

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The 2 charts above illustrate the extreme seasonality of the market, both in the numbers of new listings coming on market, and the percentage of listings that accept offers (a measurement of supply vs. demand). The second chart also shows that the market for homes under $2 million has been hotter than the luxury home market: There are fewer buyers at the ultra-high end, and luxury homes are also most prone to significant overpricing.

The spring selling season – which actually started in February last year – is typically the most feverish, and this is especially true for luxury homes: Notice, in the 2nd chart, the huge spike in demand for luxury homes last spring.

More statistical, supply and demand graphs: San Francisco Market Overview Analytics

Average Dollar per Square Foot Values

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High-end home sales hit new peaks in spring 2015, but with the stock market volatility in late August and September, the market softened, inventory increased (to its highest level ever) and sales dropped about 17% in October on a year-over-year basis. (Affluent buyers and sellers are most influenced by financial market volatility.) However, the stock market then recovered and stabilized in October and buyer confidence improved, which is reflected in the year over year increase in sales that occurred in November and December. Remember that closed sales in one month generally reflect the heat of the market  in the previous month, when the transaction was actually negotiated. Q4 2015 sales ultimately ended slightly up from Q4 2014.

Charts: Luxury House Sales by Neighborhood and Luxury Condo Sales by Neighborhood

Details, Amenities & Size

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The above details are as described in MLS by listing agents, so the numbers are very approximate. Also note that what most people might see as a unit above a laundromat, an enthusiastic listing agent might see as a “rarely available luxury penthouse.”

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One of the reasons the Pacific Heights district has by far the highest house prices in the city is that its average house size is so much larger. However, its mansions also command a very high dollar per square foot value, as seen in one of the earlier charts.

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The sales of condo shall continue to make up a larger and larger share of overall home sales in San Francisco, as new condo construction continues apace.(Condos also turn over more often than houses.) Very few new houses are built in the city – they are usually big, high-tech, beautiful and costly.

Where the Most Home Sales Occur

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San Francisco is very much a boutique market for multi-unit buildings: Our apartment buildings are generally much smaller, older and, for that matter, more gracious than those found in the suburbs. These properties are often at the heart of fierce controversies pertaining to rent control, tenants’ rights, tenant evictions, and condo conversion rules. There has been an immense increase in market-rate rents over recent years – SF is the most expensive rental market in the country– though rules restrict increases for existing tenants of buildings built before 1979 (i.e. almost all of our multi-unit properties).

The Bay Area Apartment Building Market

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The tenancy-in-common unit with an exclusive right to occupy, aka the TIC, is a property type rarely found outside of San Francisco. It was originally created as both a way to get sellers of multi-unit properties significantly more money – the individual unit sales adding up to more than the purchase of the entire building by one buyer – as well as providing a lower-cost alternative for homebuyers, since TICs typically cost 10% to 15% less than comparable condos. (The TIC phenomenon also generated significant legal fees for the lawyers who came up with the idea.) Because of changes in tenant-eviction law and condo-conversion rules, financing and other issues, the number of TIC sales has plunged since its peak in 2007. On the other hand, some TIC units are now selling for jaw-dropping prices: In 2015, 4 sold for over $5 million. The median TIC sales price last year was $947,000.

Map of San Francisco Neighborhoods

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Heading into the Holiday Slowdown after an Interesting Autumn Market

Median sales prices in October and November jumped back up to levels similar to the spring peak selling season. It’s important to remember that median prices are not a perfect reflection of changes in fair market value: They often fluctuate due to seasonal inventory and buyer-profile trends, as well as issues such as an influx of new-construction listings. It is the longer-term trend that is most meaningful – however we can say with confidence that there was clearly no significant “crash” in prices this past autumn.

Median_SFD-Condo_by-Qtr_Short-term

12-15_SP-OP_All-Sales_by-Month

One indication of the heat of the market is the extent to which sales prices are bid up over asking prices.As is not untypical, the market becomes less competitive in November as it heads into the winter holidays. Still, an average sales price 6% over asking price would be considered crazy-hot in any other market in the country (though one also has to adjust for the fact that serious underpricing has become a not uncommon listing strategy in the SF market).

Case-Shiller_High-Tier_since-2012_V2-bar-chart

This chart based on S&P Case Shiller Home Price Index data illustrates the seasonality of home price appreciation in the past 4 years: surging in our feverish spring selling seasons, and then generally plateauing through the rest of the year. Note that Case-Shiller looks at home prices in a totally different way than median sales price trends, and probably reflects changes in fair market value more accurately. Case-Shiller Index numbers refer back to a January 2000 value of 100, thus the current Index reading for higher-priced Bay Area homes of 217 signifies home prices 117% above January 2000.

As we enter the winter holiday market slowdown, the next real indication of the direction of the market will come in the first quarter of 2016. Will spring 2016 repeat the overheated, high demand/ low supply frenzies of previous springs or has the market finally reached a longer term plateau or an inflection point? We shall soon know more.

Our full report is here: S&P Case-Shiller Index for SF Metro Area

Unit-Sales_by-Price-Range-2015

n 2015 YTD, the dominant price segment for home sales in San Francisco was $1,000,000 to $1,499,000. As seen in the first chart above, the median sales prices for both condos and houses fall within this range. Note the change from just two years ago.

San Francisco Luxury Home Market

Condo-Sales_1500k-plus

Lux-Homes_Units_Sold_by_YEAR

Lux-SFD_Sales_2m-plus

The high-end home market is the most seasonal segment in the city (as well as the most sensitive to sudden, large, negative movements in the financial markets). Market activity starts to plunge in November, hits its nadir in December, begins to pick up in the first quarter and then usually hits its peak in spring. Much of the center of gravity in the luxury market has been shifting in recent years from the city’s prestige northern neighborhoods to other districts of the city, such as the greater Noe Valley area and the South Beach/Yerba Buena district. This is not to say that the northern districts are not still both very expensive and considered highly desirable, and the greater Pacific Heights area still dominates the market for the most expensive houses in the city, i.e. those selling for $5m and more.

12-15_SP500_vs_Shanghai-Composite

After the semi-hysteria – already half forgotten – that erupted in late August and September regarding the Chinese stock market and its impact on the U.S. stock market and economy, and possibly the Bay Area housing market, we thought it interesting to take a look back at how it has played out so far.

Average_30-Year_Mortgage-Rates

It is widely expected that the Fed will raise interest rates in December, probably by some minimal increment, but for the time being, as of the first week of December, rates have remained below 4%.

In November, we issued two mini-reports, one on Bay Area housing affordability and another on San Francisco new housing construction. Below are the featured charts and links to the full articles.

Affordability_Bay-Area-Counties_Chart

Bay Area Housing Affordability & Market Corrections

Q3-15_Pipeline-Net-New-Housing-Units_by-Stage

San Francisco New-Housing Pipeline Update

Information regarding San Francisco neighborhood prices and trends can be found here: San Francisco Neighborhood Values

Additional market analyses are here: San Francisco Market Reports


Luxury Home Segment Cools Down “Affordable” Homes Market Remains Competitive

San Francisco led the Bay Area and the nation when its real estate recovery began in early 2012. Within the city itself, the more affluent neighborhoods led the rebound from the 2008 – 2011 recession and saw the highest rates of home price appreciation. That dynamic began to shift in 2014, when the more affordable neighborhoods began to take the lead in demand and in appreciation. All price segments in San Francisco have cooled off from the overheated frenzy of the spring 2015 selling season – this cooling is a common seasonal phenomenon – but while lower and mid-priced homes in the city have continued to remain solidly in “seller’s market” territory, in the luxury home segment, the dynamic between buyers and sellers has fundamentally shifted, at least for the time being.

A number of reasons may explain this: Firstly, the affluent are much more invested in the stock market than other groups, and the volatility of late August, early September may have encouraged more wealthy homeowners to sell (before things might possibly get worse), and more wealthy homebuyers to postpone buying until things clarified.As of very early November, the S&P 500 has regained its lost ground from August, so this effect may fade. Secondly, it’s certainly possible that sellers and listing agents have finally pushed the envelope on prices a little too far: San Francisco’s high prices have clearly motivated some buyers to look at options outside the city (which has helped pressurize the markets of other counties). Last but not least, more and more luxury condos are being built in San Francisco: Growing supply not only gives buyers more options and more negotiating room, but it decreases the urgency to write strong offers quickly and the motivation to compete with other buyers.

However, the luxury home market hasn’t “crashed”: there are still high-end homes selling very quickly for very high prices amid competitive bidding.But it has markedly cooled and the number of luxury home listings in San Francisco hit a new high in October, so correct pricing has becomes increasingly vital. It remains to see if this change is just a transitory market blip – such blips are not uncommon in financial or real estate markets – or the beginning of a longer term reality.

Median Sales Price by Month

Median-Prices_Short-Term

Even with the general cooling in the market since spring and the significant slowdown in higher end home sales, the overall median sales price for houses and condos bounced back up to $1,200,000 in October. Median prices are impacted by seasonal trends: typically peaking in the spring, dropping in the summer, up again in the autumn and then plunging during the winter holidays. This has more to do with inventory than with changes in fair market value. Short-term fluctuations are not particularly meaningful: It is the longer-term trend that gives a sense of what’s going on in the market.

For houses alone, the median sales price in October was $1,300,000 and for condos, it was $1,100,000.

Supply & Demand Statistics
by Price Segment, October 2015

Oct-15_MSI_SFD-Condo_by_Price-Segment

Months Supply of Inventory (MSI) is a classic measurement of supply and demand, calculating the time it would take to sell the existing inventory of homes for sale at the current rate of market activity. The lower the MSI, the greater the demand as compared to the supply, i.e. the hotter the market. The house market in San Francisco has been stronger than the condo market since the recovery began – though the condo market has been crazy hot as well – because the supply of houses is more limited and is dwindling as a percentage of sales because virtually no new houses are being added to inventory. However, new condos are being built in quantity. This chart above illustrates the dramatic difference in the markets for homes up to the median price ($1.3 million for houses, $1.1 million for condos) and in the next price segment higher, versus the luxury home segment, defined here as houses selling for $2,000,000+ and condos for $1,500,000+. (By this definition, luxury sales currently make up about 20% of San Francisco’s home sales.)

Because SF has been so hot for so long, we’ve adjusted the thresholds for what MSI readings define “seller’s market” and “buyer’s market” to better reflect the psychology of the current market.

Luxury Home Listings for Sale

LuxHome_Units-for-Sale_by-Month

As mentioned earlier, the number of high-end house and condo listings hit all-time highs in October, while sales numbers are well below levels hit in the previous 2 years. Even more so than the general market, the luxury segment is dramatically affected by seasonality and typically goes into deep hibernation from Thanksgiving to mid-January. Having so many active listings on the market just prior to the winter holiday doldrums is one of the reasons why we designate the luxury-home segment as currently having moved into “buyer’s market” territory.

The Luxury Home Market: Months Supply of Inventory
Year over Year over Year Comparisons

LuxHome_MSI_YoY-Comparisons

This chart above illustrates the change in the luxury home market supply and demand balance over the past three Octobers. As a further point of context to what has happened in the past year, during the feverish market of this past spring, the MSI for luxury houses hit a low of 1.6 months of inventory and the MSI for luxury condos hit a low of 1.7 months. Since 2012, spring has consistently been the hottest, most competitive, selling season of the year and most home price appreciation has occurred during that time.

4 Neighborhood Snapshots

Bayview-House_Median-Prices_by-Year

Glen-Park_SFD_Avg-SP_DolSqFt_by_YEAR

Marina-SFD-Condo_Median-Sales-Prices

St-Francis-Wd_SFD_DolSqFt_by_YEAR

Much more information regarding SF neighborhood prices and trends can be found here: San Francisco Neighborhood Values

Average Asking Rents in San Francisco

Rents_Avg-SF_by-year

The real estate market has been challenging for homebuyers these past few years, but for anyone looking to rent a home in the city, it has been distinctly more difficult financially. Homebuyers have the benefit of historically low interest rates, multiple tax advantages and, hopefully, substantial appreciation gains over time; renters enjoy none of those advantages (though admittedly there can be long-term benefits to rent control for renters that qualify). Even with the big jump in home prices over the past 4 years, factoring in the 35% – 40% decline in interest rates and adjusting for inflation, the ongoing monthly cost of homeownership (for someone putting 20% down) is roughly the same as it was in 2007. But average monthly asking rents in the city have surged over 50% during the same period.

This has made rental property ownership an increasingly lucrative proposition, which we discuss in more detail in our last Commercial Brokerage report: Bay Area Apartment Building Market

Median Household Incomes
In Selected San Francisco Zip Codes

SF-Household-Income_by-Zip

By Bay Area County

Bay-Area_Homeowner_Median-HH-Income

Additional demographic analyses from previous reports can be found here: San Francisco & Bay Area Demographics andBay Area Affordability


October 2015 San Francisco Real Estate Report

The autumn selling season started with a large surge of new listings right after Labor Day, but it will be another month or so before preliminary statistical data is available on home sales negotiated since then. However, it is clear that the recent volatility in national and international financial markets has not so far caused a severe adjustment to local home prices. While we wait for early autumn sales to close in quantity, we’ll review the market from a variety of angles.

A wide range of other reports pertinent to SF real estate values and trends can be found here: San Francisco Market Reports and San Francisco Neighborhood Values

Short-Term & Long-Term
San Francisco Home Price Appreciation

2011 – 2015, by Quarter
Median-Price_Bar-Chart_Qtr_SFD-Condo-Combined

It’s not unusual for median prices to drop in the 3rd quarter, which happened this year as well. This has less to do with fair market value, than with the fact that the market for higher priced homes slows down much more than that of the general market in summer.

1994 – 2015, by Year
1993-2010_SF_Median_Sales_Prices_Cycle-Labels

Return on Cash Investment
Comparing Buying a Home in San Francisco
to Inflation, Gold, the S&P 500 & Apple Stock

10-15_ROI-on-Cash-Invest_Comp-RE-Gold-Apple-SP500

For the purposes of this analysis, we’ve broken home ownership into 2 aspects, the first being ongoing housingcosts – mortgage interest, home insurance, property taxes, maintenance – which after tax deductions could be compared to the cost of renting a similar home. The second aspect, illustrated in the chart above, is the cash investment side of buying a home and the compound annual return on that investment, after closing costs and loan principal repayment are deducted, if one had purchased a median SF house in 1994.

For the San Francisco Median House calculation, we used the 1994 median price ($265,000), with a 20% downpayment ($53,000) and paying 1.5% in buy-side closing costs ($3975) for a total cash investment of $56,975. Net proceeds were calculated using the 2015 YTD median sales price ($1,250,000), deducting 6% in sell-side closing costs ($75,000) and the original 80% mortgage balance ($212,000), which equals $963,000. This equals an annual compound return on investment of 14.4% over the 21-year period.

All of us should have put every penny we had into Apple stock in 1994, but barring that, purchasing a home in San Francisco would have been a decent alternative – particularly if you’d bought in Noe Valley or the Mission. Three factors not included in the above analysis further increase the financial benefits of home purchase over the other investments graphed: 1) the $250,000/$500,000 capital gains tax exclusion on the sale of a primary residence (potentially saving up to $75,000 in taxes), 2) the “forced savings” effect of gradually paying off one’s mortgage (if one resists refinancing out growing home equity), which has a substantial wealth-building effect, and 3) over time, the ongoing cost of housing with a fixed rate loan, strategically refinanced when rates go significantly lower, will usually fall well below rental costs that continue to rise with inflation.

With financial assets subject to market cycles, changing the buy or sell dates in this analysis can dramatically affect the return. We picked 1994, because of the availability of MLS median price data going back to then.

Median Sales Prices by Neighborhood

2-Bedroom Condos in San Francisco

Median_Price-2BR_Condos_by-Neighborhood

3-Bedroom Houses in San Francisco

Median_Price-3-4BR-SFD_Comp

Market Dynamics

Sales Price to List Price Percentages
& Average Days on Market

DOM_by-Price-Reduction_by-Qtr SP-OP_Comp-by-Price-Reduction_by-Qtr

These two charts above illustrate both how competitive the market has been – the average SF home selling without a price reduction sold very quickly for 13.5% over asking price in the 3rd quarter – and the significant difference between homes that get an immediate market response and thosethat have to go through one or more price reductions before selling.

Months Supply of Inventory

Seasonality, Luxury and Non-Luxury Homes

MSI_Luxury-Homes_vs_Non-Lux

The lower the Months Supply of Inventory, the stronger the buyer demand as compared to the supply of homes available to purchase. This chart illustrates the seasonality of the real estate market – typically strongest in spring (especially) and autumn, and slowing down during the summer and especially the winter holidays. It also shows that the lower-priced home segment is generally hotter than the higher priced – as shown by the lower MSI readings – and finally, how much more the luxury home segment is affected by seasonality. The dramatic slowdown in the highest-priced segment during summer and winter is one of the big reasons why median home prices usually drop during those seasons.

Condo Average-Dollar-per-Square-Foot Values
by Era of Construction

AvgDolSqFt_Condo-by-Era-Built

The Most Expensive Condo Buildings in San Francisco
Condos_Most-Expensive-Buildings

This doesn’t include brand new luxury condo developments – some of which are selling at very high prices – nor many very expensive and very prestigious condo and co-op buildings which simply have too few sales for meaningful statistical analysis.

3rd Quarter Market Snapshot
New-UC-Expired-DOM-Median_by-Property-Type

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. Statistics are generalities and all numbers should be considered approximate. How any median or average statistic applies to a particular home is unknown without a specific comparative market analysis. We are not qualified to render legal or tax advice of any kind. Sales statistics of one month generally reflect offers negotiated 4 – 6 weeks earlier.

© 2015 Paragon Real Estate Group
 


Autumn SF Home Selling Season Begins Against Backdrop of Market Volatility

Real estate markets are essentially determined by the balance – or imbalance, as is often the case – between buyer demand and seller supply of homes to purchase. Underlying that dynamic are economic, political and demographic factors – some local, some not – such as population growth, employment, new home construction, high-tech booms, consumer confidence, interest rates, affordability, IPOs, stock market movements, shenanigans in Congress, and SF ballot proposals, to name a few. Even environmental factors, such as droughts and earthquakes, can jump in and affect the market. These factors are all jostling for effect, ebbing and flowing, sometimes appearing out of nowhere to shake things up, or suddenly shrinking and quickly forgotten.

We are neither blithe optimists, for whom boom times will never end, nor inveterate pessimists, who see bubbles and crashes behind every shrub. For what it’s worth, based on our survey of current economic fundamentals, we don’t expect an imminent crash in the U.S. stock market or in Bay Area real estate values. (This short New Yorker article is excellent on recent market volatility: Drop in the Bucket) However, economies and markets naturally experience fluctuations – short-term ups and downs, times of slowing and flattening – and it’s certainly possible that the balance between buyers and sellers might shift, that the frenzy in our market may subside, and that home prices may plateau or even tick down to some degree. On the other hand, due to the scale of our high-tech boom (another area of exuberantly conflicting predictions) and our deeply inadequate supply of housing, demand may continue to exceed supply, and the pressures of recent years may continue until new-home construction makes a more significant contribution to inventory.

New Listings Coming on Market

Seasonality_New-Listings

September is usually the single month with the greatest number of new listings, and those that hit the market in the 4 to 5 weeks after Labor Day feed the vast majority of autumn sales activity until the market goes into hibernation mode in mid-late November. Preliminary indications are that this may be a very big new-listing month, even for a September. If this is true, and especially if it marks the beginning of a trend of more listings coming on market, that could cool the ferociously competitive, low-inventory, “seller’s market” of recent years. If buyers are more hesitant due to recent financial-market volatility, that would also cool the market. But, in our opinion, neither factor is likely to flip us into a crashing or recessionary market.

Percentage of Listings Accepting Offers

Percent_UC_SFD-Condo_by_Quarter

This chart illustrates the surge in buyer demand from the end of the last recession through the 2012 – 2015 recovery. Having the percentage of listings accepting offers over 50% and sometimes well over 60% in a given quarter – extremely high percentages historically – has applied consistent upward pressure on home prices. Demand usually peaks during the spring and autumn selling seasons, i.e. in the 2nd and 4th quarters.

Additional market indicator analyses can be found here: SF Market Overview Analytics

S&P Case-Shiller Home Price Index

Case-Shiller_from_1990

An updated Case-Shiller Index chart for the 5-county San Francisco Metro Area, outlining the real estate market cycles going back to the 1980’s. (The June Index was released on August 25th.) It is noteworthy that over the past several decades, we’ve never seen a crash or significant “correction” in our real estate market that was not in conjunction with a major, sustained, national economic event. This chart also suggests that SF buyers who purchase homes 1) they can afford in the first place, 2) using fixed-rate mortgages, and 3) for longer-term ownership, usually come out all right, and often fabulously well, despite periodic market declines.

“Renting can make sense as a lifestyle choice or because of income constraints. As a means to building wealth, however, there is no practical substitute for homeownership.”
Homeownership & Wealth Creation, 11/30/14, NYT op-ed article

The Case-Shiller chart above reflects sales in the upper third of Bay Area home sales (i.e. “high-price-tier”) – which applies best to SF homes. Even in the high tier, the city has generally outperformed the Bay Area in home price appreciation. The numbers on the graph refer to a January 2000 price of 100; thus, the number 217 signifies a price 117% above then. It is interesting to note, that as of the June Index report, all three Bay Area home-price tiers – low, mid and high – have readings of 117% appreciation since 2000, which may be a sign of an equilibrium being reached in the market. Our full report: Case-Shiller for SF Bay Area

Bay Area Housing Affordability

Housing-Affordability-Index

The California Association of Realtors recently released its Housing Affordability Index (HAI) for the 2nd quarter of 2015. All Bay Area counties saw declines in their affordability index reading – which measures the percentage of households that can afford to buy the median priced single family dwelling (house) – and San Francisco is now only 2 percentage points above its all-time low of 8%, last reached in Q3 2007.

Very low affordability at a time of very low interest rates is certainly a concern, but housing affordability is a complex subject and there are other factors at play in San Francisco. Our full report, which also charts median home prices, rents, interest rates, inflation-adjusted housing costs and household income by county is here: Bay Area Housing Affordability

Where to Buy at What Price Point

8-15-House-Sales_1m-1499k-by-Neighborhood

We’ve recently updated our report on where one is most likely to find a house or condo in one’s price range. The chart above is 1 of 7 delineating San Francisco neighborhoods with homes from under $1 million to over $5 million: San Francisco Neighborhood Affordability

Median Home Prices and Economic Indicators

A glance at recent movements in San Francisco’s median home sales price, as well as at a few longer-term local and national economic indicators.

Monthly fluctuations – often seasonally related – have been common since
2012, but home prices have consistently climbed higher over the longer term.

Median-Prices_Short-Term

National and San Francisco unemployment trends: Very positive.

Unemployment-Rates_US-SF_since-1990

Over 100,000 new SF jobs – many of them very well paid – have been created since 2009. (The housing supply has increased by less than 15,000 units.)

Employment_SF-by-year

Household debt to GDP and mortgage debt service ratios – huge issues
in the 2007-2008 crash – have significantly declined since then.

Household-Debt-to-GDP-Ratio_US-since-1990

Mortgage-Debt-Ratios_US_since-1990

Sustained movements in the S&P 500 Index largely correlate to SF home-
price trends. Short-term financial-market fluctuations typically have no effect.

8-26-15_SP-Stock-Market

Price to Earnings (PE) Ratios of the S&P 500 Index climbed a bit high
in mid-2015, but not egregiously so compared to historical averages.

SP500_PE-Ratio_since-1986

Our goal is not to convince you of a certain position, but to provide you with what we believe to be reliable data, so that you can make your own informed decisions.

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. Statistics are generalities and all numbers should be considered approximate. Sales statistics of one month generally reflect offers negotiated 4 – 6 weeks earlier.

© 2015 Paragon Real Estate Group



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