Recessions, Recoveries & Bubbles
30 Years of Housing Market Cycles in San Francisco
Updated Report, September 24, 2013
Below is a look at the past 30 years of San Francisco Bay Area real estate boom and bust cycles. Financial-market cycles have been around for hundreds of years, all the way back to the Dutch tulip mania of the 1600’s. While future cycles will vary in their details, the causes, effects and trend lines are often quite similar. Looking at cycles gives us more context to how the market works over time and where it may be going -- much more than dwelling in the immediacy of the present with excitable pronouncements of "The market's crashing and won't recover in our lifetimes!" or "The market's crazy hot and the only place it can go is up!"
1982 – 2013: A Simplified Overview
Up, Down, Flat, Up, Down, Flat...(Repeat)
Smoothing out the bumps delivers this overview for the past 30 years. Whatever the phase of the cycle, up or down, while it’s going on people think it will last forever: Every time the market crashes, the consensus becomes that real estate won’t recover for decades. But the economy mends, the population grows, people start families, inflation builds up over the years, and repressed demand of those who want to own their own homes builds up. In the early eighties, mid-nineties and in 2012, after about 4 years of a recessionary housing market, this repressed demand jumps back in (or "explodes" might be a good description) and prices start to rise again. It's not unusual for a big surge in values to occur in the first couple years after a recovery begins.
Surprisingly consistent: Over the past 30+ years, the period between a recovery beginning and a bubble popping has run approximately 6 years, which is not really much time to go from a negative market outlook to "irrational exuberance." We are currently something less than 2 years into the current recovery. Periods of market recession/doldrums following the popping of a bubble have typically lasted about 4 to 5 years. Generally speaking, within about 2 years of a new recovery commencing, previous peak values (i.e. those at the height of the previous bubble) are re-attained -- among other reasons, there is the recapture of inflation during the doldrums years. In this current recovery, those homes hit hardest by the subprime loan crisis -- typically housing at the lowest end of the price scale in the less affluent neighborhoods, which experienced by far the biggest bubble and biggest crash -- may take significantly longer to re-attain peak values (see the fourth chart down), but higher priced homes are already doing so.
These timelines of recession, recovery, bubble and market adjustment (or crash) can be discerned in more detail in the charts below. However, this does not mean that these recurring time periods necessarily reflect some natural law in housing market cycles, or that they can be relied upon to predict the future.
In the charts below tracking the S&P Case-Shiller Home Price Index for the 5-County San Francisco Metro Area (charts 1, 2 & 4), the data points refer to home values as a percentage of those in January 2000. January 2000 equals 100 on the trend line: 66 means prices were 66% of those in January 2000; 175 signifies prices 75% higher.
Adjusting your screenview to zoom 125% will make the charts easier to read.
1983 through 1995
(After Recession) Boom, Decline, Doldrums
In the above chart, the country is just coming out of the late seventies, early eighties recession – huge inflation, stagnant economy (“stagflation”) and incredibly high interest rates (hitting 18%). As the economy recovered, the housing market started to appreciate and this surge in values began to accelerate deeper into the decade. Over 6 years, the market appreciated almost 100%. Finally, the eighties version of irrational exuberance -- junk bonds, stock market swindles, the Savings & Loan implosion, as well as the late 1989 earthquake here in the Bay Area -- ended the party.
Recession arrived, home prices sank, sales activity plunged and the market stayed flat for 4 to 5 years. Still, even after the decline, home values were 70% higher than when the boom began in 1984.
1996 to Present
(After Recession) Boom, Bubble, Crash, Doldrums, Recovery
This next cycle looks similar but elongated. In 1996, after years of recession, the market suddenly took off and became frenzied -- actually quite similar to what we’re experiencing today. The dotcom bubble pop and September 2001 attacks created a market hiccup, but then the subprime and refinance insanity, degraded loan underwriting standards, mortgage securitization, and claims that real estate never declines, super-charged a housing bubble. Overall, from 1996 to 2006/2008, the market went through an astounding period of appreciation. (Different areas hit peak values at times from 2006 to early 2008.) The air started to go out of some markets in 2007, but in September 2008 came the market crash.
Across the country, home values fell 15% to 60%, peak to bottom, depending on the area and how badly it was affected by foreclosures -- most of San Francisco got off comparatively lightly with declines in the 15% to 25% range. The least affluent areas got hammered hardest by distressed sales and price declines; the most affluent were typically least affected. Then the market stayed flat for about 4 years, albeit with a few short-term fluctuations. Supply and demand dynamics began to change in mid-2011, leading to the market recovery of 2012.
And in this chart, we graphed the sales prices of 6 San Francisco homes that sold on multiple occasions between 1995 and 2013 -- real property sales behind the general market cycles. Please note that with specific sales, there may be other factors contributing to appreciation besides the simple passage of time, such as renovation or remodeling work performed.
San Francisco from 2010 to 2013
A Strong Recovery in Process
In 2011, San Francisco began to show signs of perking up. An improving economy and growing buyer demand coupled with a low inventory of listings began to put upward pressure on prices. In 2012, as in 1996, the market abruptly grew frenzied with competitive bidding. The city’s affluent neighborhoods led the recovery, and those considered particularly desirable by newly wealthy, high-tech workers showed the largest gains. However, virtually the entire city soon followed to experience similar rapid price appreciation.
San Francisco median home sales prices increased dramatically in 2012 and then accelerated further in the first half of 2013, though varying by neighborhood. (Note that third quarter figures will probably show the typical seasonal decline: real estate also has seasonal cycles.) By all appearances, San Francisco and the Bay Area are in the midst of a very healthy recovery, though the economy always remains susceptible to big financial/political crises. New home construction is rising very dramatically, distressed sales are declining dramatically, the rent vs. buy equation has turned favorable to buying, interest rates are still relatively low (despite their recent spike in summer 2013) and general economic conditions seem to be continuing to improve.
Bay Area Bubble, Crash & Recovery by Price Range
This chart, updated through the June Case-Shiller Index (issued in late August), illustrates the huge differences in the degree of value increases and declines experienced by different price segments of single-family housing in the Bay Area: The lower the price range, the more it was affected by subprime lending, which created the bigger bubble; this led to a much larger percentage of foreclosures and distressed sales and a much more dramatic crash. San Francisco, with its expensive housing, suffered less than most places, though it still certainly suffered. Distressed sales never made up the huge percentage of sales they reached in other counties, and now, with the market rebound, distressed-home listings in SF have virtually disappeared and are rapidly declining everywhere.
Very generally speaking, the more affluent areas of the city saw a peak-to-bottom decline in the 15% to 20% range; the city’s middle price range saw 15% to 25% declines; and its lowest price segment went down 25% to 40%. (Some of the other areas of the Bay Area and country saw much larger declines as seen in the chart above.) The city is now seeing a rapid reversal of those declines - indeed some neighborhoods (as of summer 2013) now appear to be hitting or even exceeding the values of the previous peak of the San Francisco homes market in 2007-2008. It's still a bit early to make definitive conclusions, since values fluctuate for a number of reasons, including seasonality.
Note on Methods and Data Sets
Calculating home price percentage changes, such as increases to or declines from peak value, are notoriously variable. The most dramatic results -- and most often quoted in the media -- come from picking the absolute highest value or lowest value month as the point of comparison. But monthly data often fluctuates dramatically without great significance, and we typically prefer quarterly or annual statistics if available. However, if a market is changing quickly, then monthly data must be used to illuminate the incipient trend. Still, sustained longer-term trends are always the most meaningful.
Also, it should be noted that the San Francisco Bay Area "market" is really made up of hundreds of different micro-markets by price range, neighborhood and city, and that these don't move in perfect lock step.
Percentage increases and declines are not created equal: A price jump from $500,000 to $1,000,000 equals a 100% increase, but falling back from $1,000,000 to $500,000, the same dollar change equals only a 50% decline.
The above charts use a variety of data sets: S&P Case-Shiller Indices, San Francisco MLS sales and median sales prices from state and national Realtor Associations. Each has its own specific market area, property types and time period tracked, and methodology. These analyses were performed in good faith to create what we believe are true, if only approximate, reflections of market trends over time.
Statistics are generalities and should be considered approximations. How they apply to any specific property is unknown.
All data herein is derived from sources deemed reliable, but may contain errors and omissions, and is subject to revision.
© Paragon Real Estate Group, 2013