The average price of one bedroom condominium in San Francisco is $630,000 as of June 2013. This would presumably buy you a mansion in much of the country, but in San Francisco it lands you an 898 square foot condo. And if you’re looking for a little more room, a two bedroom in San Francisco costs $893,000 and a three bedroom $1,235,000. You don't want to know what a four bedroom costs.
Previously we investigated San Francisco's rapidly-escalating rent prices. In this post, we consider what’s happening to the price of buying a home in San Francisco. Luckily our friends at Polaris Pacific, a firm that specializes in the sale of new condos in California, have been tracking the purchase prices of condominums in San Francisco for a while now. Miles Garber, their VP of Research, graciously shared their data with us.
The data set includes every condominium sale in San Francisco since 1995. It documents the history of San Francisco through the lens of housing prices: the dotcom boom and crash, the housing bubble and subsequent recession, and now, the tech-fueled San Francisco real estate boom.
A Boom-Bust Kind of Town
It’s expensive to buy a home in San Francisco. But when you take a look back at San Francisco condo prices, you'll notice that although it’s expensive today, the city was also pricey in 2008 and 2007 and 2005 and well, a lot of years. Preceding each of these years, prices rose steeply but then eventually fell. Real estate prices in the city boom and then they bust. The current run-up in SF home prices is nothing new.
If you adjust prices for inflation, the boom-bust cycle becomes even more apparent. Prices are high today and rising quickly, but this sort of thing happens every few years in the City by the Bay.
Surprisingly, prices today are actually lower than they were in 2005 and 2007 after accounting for inflation and only 11% higher than they were in 2000. So how much higher can prices rise during this current boom before gravity inevitably brings them back to earth?
We spoke to Andrew Jeffrey at Cirios real estate who suggested an interesting method for gauging the temperature of a real estate market - look at how many buyers have to pay above the listed asking price for a home. In really hot markets, everyone needs to bid above asking price to triumph over a frenzy of competing bidders. In cool markets, they don’t. We thought this was a great way of measuring the “exuberance” of a market.
San Francisco reached peak exuberance in 2000 during the first Internet boom when 74% of homes sold above the asking price. By the next year, prices plummeted and most people paid below or at the asking price. By 2005, however, 73% of buyers paid above ask. During the first half of 2013, that number reached 64%. The market seems on its way to peak levels. Miles Garber at Polaris Pacific tells us that the supply of homes for sale in San Francisco is still low by historical standards, which will continue to push prices upward.
Housing prices in San Francisco are currently crazy high, but they are not without precedent. By historical standards, the San Francisco real estate market has not hit peak exuberance quite yet. Prices and over-bidding will likely continue to rise, but if history is any guide, they will eventually fall. The question is, when?