Price Cuts

August 2020

Welcome to our August newsletter. This month, we take an initial look at the first half of 2020 in the context of the local, state, and national real estate markets. Since March, the pandemic has brought us largely indoors into our homes. Many of us have learned through the last several months that the quality of our dwellings greatly affects the quality of our lives. During uncertain times like these, we will continue to provide you with the most up-to-date market information, so you, our friends and clients, feel supported and informed.

In this month’s newsletter, we cover the following:

Key News and Trends in July: Across the United States, COVID-19 cases continue to rise as both the economy and rental markets struggle. Meanwhile, pending home sales set records nationwide.
July Housing Market Updates: San Francisco’s single-family home prices climb to their highest levels in over two years due to a steep drop in new listings alongside growing buyer demand.

Key News and Trends Impacting Your Local Market

The rental property market is one sector of the economy feeling the effects of the prolonged pandemic. As reported by Curbed, the rent for one-bedroom apartments in San Francisco fell 9.2% year-over-year in May. Curbed also believes that rent drops may be even higher since some landlords conceal price drops in lease specials like six weeks of free rent for new move-ins. Compared to homeowners who have access to useful financial support tools, namely refinancing at a lower rate and forbearance, lowering rents is difficult to do because rents can only be renegotiated if the landlord is willing. While San Francisco recently extended the moratorium on rent evictions during the pandemic, the protections do not include rent cancellation; renters will still owe missed rental payments within six months. In general, renters are the first to experience housing burdens because they have much smaller savings and are more vulnerable to income shocks. As reported by UC Berkeley in April, roughly 50% of likely-impacted renter households were already struggling with rental cost burdens before the COVID-19 crisis took hold. Although the decline in renters will not necessarily impact single-family homes and condos immediately, a persistent exodus and subsequent rent price declines could slowly make its way to homeowners’ equity. One way to value a home is to calculate the net present value of rental income were the owner to rent the property.

Meanwhile, both state and local housing markets remain resilient, partly because of healthy home sales in an undersupplied market, which is a phenomenon also seen nationwide. On June 29th, the National Association of Realtors (NAR) reported that pending home sales mounted a record comeback in May, rising 44% and chronicling the highest month-over-month gain since the index’s inception in 2001.

Housing Market Update for San Francisco

Looking at the yearly price data, single-family homes were up 3% from this time last year, while condos were down 7%.

San Francisco’s prices tend to be buoyed by lack of supply compared to demand. As we continue to report, the biggest impact has been on sellers who face logistical challenges in selling their homes, such as the safety of inviting prospective buyers into an occupied home. The majority of sellers are simultaneously buyers themselves, which means they are navigating two transactions. For this reason, sellers have taken a tempered approach to entering the market.

Unfortunately, COVID-19’s rise seems to have amplified buyer and seller tendencies. Weekly new listings for both single-family homes and condos continued falling in June nearly back to the levels at which they were in late March and early April.

Months of Supply Inventory (MSI), the measure of how many months it would take for all the current homes for sale on the market to sell at the current rate of sales, has an average of three months in California. A number lower than three means that buyers are dominating the market and there are relatively few sellers; a higher number means there are more sellers than buyers. In June, the MSI for single-family homes fell well below the three-month average and now heavily favors the sellers once again. The MSI of condos was not as tight; however, it was low enough to insulate prices.

Record prices indicate that there are not many bargains on the market. However, June’s sale-to-list ratios—which compare the prices buyers pay to the original list prices of homes—suggests that buyers are also not paying large premiums due to bidding wars. The chart below illustrates the price that the average San Francisco buyer negotiated, above or below list price, to put a property under contract. In June, both single-family homes and condos sold in line with the original list price.

Lastly, we look at the percent of homes with price cuts. In San Francisco, 16% of single-family home prices were cut, up from only 7% in April. Meanwhile, the percent of condos with price cuts fell. In our May newsletter, we reported that many sellers were reluctant to lower their list prices, asserting that the failure to sell was due to the pandemic rather than an overpriced home. For single-family homes, at least, some sellers may finally be willing to reduce their prices.

In summary, as we discussed in previous newsletters, the fundamentals of the housing market were strong before the global economy stalled, and they have continued to show stability. The prolonged pandemic will continue to cause fluctuations in the market, some of which can be measured weekly.

Looking ahead, we anticipate the undersupply in housing to continue. The COVID-19 spike in California and across the country has created economic and personal unease. Sellers tend to be more timid during this time while buyers are more aggressive, feeding into the undersupply and lifting home prices. As more supply becomes available, there could be a correction in the market, but we do not believe that is likely through the summer months.

We hope you found this info in this month’s newsletter helpful. Should you have any questions about the market, or wonder what home-improvement projects will give you the biggest bang for the buck, I am always just a cell phone call away: (415) 595-7661.

Cheers,