Housing Market Splits: San Francisco House Prices do Holy-Moly Spike, Condo Prices Flat for 3 Years

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by Wolf Richter, Wolf Street:

Amid record surge in luxury house sales.

The San Francisco market is dominated by condos. Over the past few decades, nearly all residential construction was for multifamily buildings – apartments and condos – and almost no single-family houses were built, which makes sense for a city that is boxed in by water on three sides.

In terms of condos over the past four months, sales hovered around 450 units per month, not including sales of new condos that are handled directly by the sales offices of the developers and not reported to the MLS. House sales were in the 300 unit per month range. So that’s the size of the market, with condo sales being generally higher than house sales. And this market has totally split in two.

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Over the past four months, culminating in June, there has been a historic surge in sales of luxury houses in San Francisco. Luxury in San Francisco starts at $3 million. In June, according to Compass, 70 luxury house sales closed, nearly double the prior peaks.

A good part of this spike in luxury house sales has to do with the fact that the wealthy got immensely wealthier in this pandemic, thanks to the asset price inflation strategy the Fed has pursued – going for the infamous “Wealth Effect” – and some of them bought luxury houses.

Median prices are sensitive to changes in mix. And this record number of luxury house sales that closed over the past four months altered the mix of total house sales and skewed the median price upward (a sharp decline in the number of luxury sales in future months would unwind some of that price spike).

And so, according to MLS data provided by Thomas Stone, a retired real estate broker in Sonoma County, the median price of single family houses in June spiked to $2.1 million, having tripled since 2012, for a beautiful WTF moment:

But condos beg to differ.

While the median price of condos has been volatile, bouncing up and down as median prices do, it has gone nowhere for over three years.

In June, the median price of condos was $1.28 million, about where it had first been in March 2018. While the median house price tripled since 2012, the median condo price only doubled since then. OK, that sounds kind of funny, something that “only doubled” in nine years, I mean, what kind of rinky-dink market is San Francisco?

Condos had their share of crazy price increases, but before March 2018. Since then, the median price bounced up and down but essentially went nowhere. And there has for years been a large number of condos on the market, with new ones being put on the market all the time.

During the housing bust, the median condo price and the median house price were not that far apart; but since 2015, the spread started widening, and now the median house price is $900,000 higher than the median condo price:

“All of the markets are fear-driven, and none of them are rational,” said Thomas Stone, the retired real estate broker, regarding this situation (he’ll be happy to send readers an MLS-generated housing-trends report for any of the Northern California counties, free; you can find his email here).

Similar situation in the broader Bay Area.

In the five-county Bay Area that the Case-Shiller Home Price Index covers – San Francisco, San Mateo, Alameda, Contra Costa, and Marin – similar trends are playing out. But the Case-Shiller methodology avoids the problem of a change in mix skewing the median price because it doesn’t use median price; it uses the “sales pairs” method, where the sales price of a home in the current month is compared to the sales price of the same home when it sold previously. That’s a big advantage.

The disadvantage is that it lags about four months behind the point when the actual deals were made, compared to the median price index which lags roughly one month behind the actual deals.

This chart shows house-price indexes by price tiers and the condo price index (red) in the five-county Bay Area. San Francisco is the most expensive housing market among the five counties, but it also has the largest share of condos.

House prices in all price tiers started spiking last year, while condo prices continued to go nowhere. The last reading of the condo price index (“April”) was where it had first been in mid-2018:

The San Francisco Bay Area entered the pandemic with a flat housing market. According to the Case-Shiller Indexes, in all of 2019, house prices had been slightly down or slightly up year-over-year, depending on the month. Median prices showed similar trends. Condo prices were down a little year-over-year in 2019.

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