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The effects of increased single-family home and condo inventory in San Francisco

The effects of increased single-family home and condo inventory in San Francisco

October 2020
This month, we discuss the effects of increased single-family home and condo inventory in San Francisco and examine the connection between per capita income and home prices, which can help explain why median prices remain stable despite the supply increases. Over the past few months, the market has flipped from favoring sellers, which has been the norm in San Francisco, to favoring buyers, especially in the condo market. As the market ebbs and flows, we continue to provide you with the most up-to-date market information, so you feel supported and informed in your buying and selling decisions.
In this month’s newsletter, we cover the following:
  • Key Topics and Trends in September: Pinterest Inc.’s lease break, which ends the company’s plans to expand its San Francisco office space, underscores the larger trend toward more permanent remote work. The increase in remote workers has dropped rental rates, but it has not affected home prices.
  • September Housing Market Updates: Inventory remains higher than normal, which has not significantly impacted price thus far. The Days on Market (DOM) for condos, however, has increased dramatically as more and more condos come to market.

Key News and Trends In September

The pandemic tested the efficacy of large-scale remote work, causing companies to reconsider the need for massive office spaces. SFGate reports that San Francisco is not going through an abnormal population exodus; rather, San Francisco simply is not seeing the usually high number of people moving to the city. The effect remains mostly the same in that there is less renter demand, which has caused one-and two-bedroom apartment prices to drop around 15% year-over-year.
Although fewer people moving to the city sounds like it would lower the demand for homes and, therefore, decrease home prices, the median home price has actually remained stable through August. In order to explain why prices have not changed, we can look to affordability. According to the California Association of Realtors, a median homeowner needs to earn a minimum income of $322,000 and be able to pay $8,000 per month for mortgage, taxes, and insurance. This type of wealth is far different than the average renter, who now pays less than $3,000 per month.
Unlike many other cities around the country where the cost of a mortgage is similar to the cost of rent, San Francisco maintains a large gap between those that can afford rent versus those that can afford a mortgage. The rental market, which is receiving a lot of press for its steep decline, does not foreshadow a decline in single-family home prices.

Housing Market Update for San Francisco
In August, single-family home and condo prices remained relatively unchanged despite more inventory coming to market.
Year-over-year, single-family home prices are up 4%, while condos are down 1%.
The inventory of homes for sale remains near its highest levels since 2010. Typically, a surge in supply would bring down prices; however, demand still outpaces supply even with the 40% year-over-year increase in active listings. Lack of supply compared to demand typically buoys San Francisco’s prices, which still remains true. We believe that the supply will make the market more efficient because buyers will have more options to find what they actually want, which will lead to more sales. San Francisco has needed more supply for quite some time, so I view the influx as a net positive for the market.
To fully appreciate the rise in inventory, we must look at how new listings and sales behaved in 2020. During the initial months of the pandemic (March and April), buyers and sellers hesitated to enter the market, or entirely withdrew from it. Sellers, especially those with condos, began to reenter the market in May, driving up condo inventory. New listings for single-family homes increased in May and June, but were still below seasonal norms. With the current amount of active inventory, the decrease in new listings in August is a natural reaction to the oversupply.
Home sales fell to their lowest levels since 2009 in April and May and were also down significantly in June. We’ve seen a large year-over-year sales increase in August, which is an amazing recovery from the lows in May. The increased inventory gives buyers a larger selection and greater ability to find the right home.
We can look to Months of Supply Inventory (MSI)—the measure of how many months it would take for all current homes for sale on the market to sell at the current rate of sales—as a metric to judge whether the market favors buyers or sellers. MSI has an average of three months in California, which indicates a balanced market. An MSI lower than three means that buyers are dominating the market and there are relatively few sellers, while a higher MSI means there are more sellers than buyers. In August, the MSI for single-family homes fell near the three-month mark indicating that the market is balanced, neither favoring buyers or sellers. The MSI of condos (around 6.5) was not as tight and clearly favors buyers; however, it is trending lower with the increase in sales.
The Days on Market (DOM) for condos continued its upward trend through August, corresponding to the increased inventory, and is more in line with what we typically see in the winter season. Condos are taking longer to sell while the DOM for single-family homes remains consistently low.
Home prices have remained steady despite a large boost in inventory, especially for condos, over the last several months. San Francisco, and California in general, tend to live in a constant state of undersupply, which elevates home prices. We often are able to explain home price fluctuation through supply and demand, but recent months point toward a third factor, Per Capita Income, which explains why the large increase in supply did not cause a similar drop in price.
I found that San Francisco home prices track much more similarly to per capita income rather than working population (as a proxy for potential home demand) as shown in the chart below. Per capita income illustrates why home prices don’t immediately fall when more inventory comes to market. Simply put: home values are supported by the overall wealth in the area.
Those unaffected financially by the pandemic likely have more money than expected without the usual travel and entertainment expenses. With more expendable income and low cost financing, we expect home prices to remain stable.
In summary, the high levels of inventory have made the market more favorable to buyers, but have not yet impacted price as shown by the year-over-year numbers. In July, condo inventory increased over 100%, and, in August, the median price only decreased by 1% to the highly skilled workers and subsequent wealth in the area. I believe sales will continue to trend upward and bring the market closer to balance. The housing market has shown its resilience through the pandemic and remains one of the safest asset classes.
Moving forward, I anticipate new listings to slow until excess inventory lowers. Home prices will likely remain stable without outsized gains or losses year-over-year.
I 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.

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