Amid a record spike in luxury home sales.
By Wolf Richter for WOLF STREET.
The San Francisco market is dominated by condominiums. In the past few decades, almost all of the residential construction for apartment buildings – apartments and condominiums – and almost no single-family homes has been built, which makes sense for a city enclosed on three sides by the water.
For condominiums, sales have been around 450 units per month for the past four months, excluding new condominium sales that are handled directly by the developers’ sales offices and not reported to the MLS. Home sales were in the range of 300 units per month. So that’s the size of the market, with condominium sales generally being higher than home sales. And this market has totally split in two.
For the past four months, which peaked in June, there has been a historic surge in luxury home sales in San Francisco. Luxury in San Francisco starts at $ 3 million. In June, Compass closed 70 luxury home sales, nearly double the previous highs.
A good part of this surge in luxury home sales has to do with the fact that the wealthy bought luxury homes in this pandemic thanks to the Fed’s asset price inflation strategy – for the infamous “wealth effect” – and some of them.
Median prices are sensitive to changes in the mix. And that record number of luxury home sales, completed in the past four months, changed the mix of total home sales and skewed the median price upward (a sharp drop in the number of luxury home sales in the coming months would cushion some of that price hike).
According to MLS data from Thomas Stone, a retired real estate agent in Sonoma County, the average price for single-family homes rose to $ 2.1 million in June, after having tripled since 2012, for a lovely WTF moment:
But condos are different.
While the median price of condos has been volatile and like the median prices fluctuated up and down, it hasn’t gone anywhere in over three years.
In June, the average condominium price was $ 1.28 million, roughly what it was in March 2018. While the average home price has tripled since 2012, the average condominium price has only doubled since then. OK, that sounds kind of weird, something that “only doubled” in nine years, I mean, what kind of rinky dink market is San Francisco?
Condos had their share of insane price hikes, but before March 2018. Since then, the median price has bounced up and down but has essentially gone nowhere. And there have been a variety of condos on the market for years, with new ones arriving all the time.
During the real estate crisis, the average house price and the average house price were not that far apart; but since 2015 the spread has started to widen, and now the average home price is $ 900,000 above the average condo price:
“All markets are fear-driven and none of them are rational,” said Thomas Stone, the retired real estate agent, of the situation (he is happy to send readers an MLS report on housing trends for all of the Northern California counties, free of charge; Mail can be found here).
Similar situation in the wider Bay Area.
Similar trends are playing out in the Bay Area, which has five counties covered by the Case-Shiller Home Price Index – San Francisco, San Mateo, Alameda, Contra Costa, and Marin. But the Case-Shiller methodology avoids the problem of a change in the mix that skews the median price because it does not use the median price; It uses the “Sales Pairs” method, which compares the selling price of a house in the current month to the selling price of the same house when it was previously sold. That’s a big advantage.
The downside is that it is about four months behind the time the actual deals were closed compared to the median price index, which is about a month behind the actual deals.
This graphic shows the house price indices by price level and the condominium price index (red) in the Bay Area with five counties. San Francisco is the most expensive housing market among the five counties, but it also has the largest proportion of condominiums.
Property prices in all price ranges began to rise last year, while condominium prices continued to go nowhere. The last reading of the price index for condominiums (“April”) was the first status in mid-2018:
The San Francisco Bay Area entered the pandemic with a flat housing market. According to the Case-Shiller indices, house prices were down or up slightly year-on-year for all of 2019, depending on the month. The median prices showed similar trends. The prices for condominiums fell slightly in 2019 compared to the previous year.
What changed everything in terms of house prices was the pandemic – the wealth effect – and house prices suddenly exploded. But the pandemic hasn’t significantly changed condominium prices.
Stuff for empty thoughts: Condominium prices also flattened in the years before the housing crisis in the San Francisco Bay Area, according to the Case-Shiller chart above.
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