There has been much talk about how fantastically low the inventory of home listings has become in San Francisco (and other areas), with much speculation regarding the reasons why sellers aren't selling
- but that is not the issue that is impacting the supply of homes on the market most.
some context: For the last 15 years, the number of MLS home sales in San
Francisco has ranged from 4663 in 2009 to 7887 in 2004, with an average of 6115
per year. In 2014, MLS sales numbered 6120. Sales outside of MLS have increased
as the market has become hotter (for both legitimate and not-so-good reasons),
and non-MLS new-condo sales have also increased. These 2 categories of sales
would swell the 2014 total.
another angle, studies have estimated that on average about 5% of U.S.
owner-occupier homeowners sell annually. According to the census, there are
approximately 125,000 owner-occupied housing units in SF: 5% would equal about 6250
home re-sales per year. Sales of tenant-occupied homes and new construction condos
would be additional.
numbers of new listings and home sales in San Francisco are certainly lower
than expected in such a hot market and some of the subsidiary reasons (including homeowners deciding not to sell) are
discussed at the end of this analysis. However, as seen above, annual sales numbers
are not wildly out of whack from historical trends.
principal factor behind the perception
of drastically low inventory is simply hugely increased demand
: Over the past 5
years, the city’s population and employment rolls have soared, while new housing construction
has not remotely kept pace. Higher demand means homes sell more quickly, which then
shrinks the number of listings on the market at any given time
(which is really how we perceive supply, i.e. in the context of the time period in which a buyer is looking).
An analogy might help explain this: A water hole (of listings for sale) is fed by a relatively constant
stream (of new listings coming on market), but it still gets significantly diminished as more people drink from it.
are 3 charts illustrating the issue. The first two, regarding days-on-market
and percentage of listings accepting offers, are based on actual SF market
statistics. The third chart is a sample illustration of the effect of
increasing demand on the supply of homes for sale, even if the number of new
listings coming on market doesn’t decline.
Chart 1: New listings are selling much faster.
Chart 2: The percentage of listings selling
each quarter has significantly increased.
Chart 3 (sample illustration): Higher
demand – even with a constant number of new listings coming on market –
dramatically decreases the inventory of homes for sale at any given time.
This illustration assumes 600 new MLS listings hitting the SF market each and every quarter, which is close to the average for recent years. In the real world it ebbs and flows by season and, to a lesser degree, sometimes by year.
certainly are other,
distinctive, but lesser factors
exacerbating our low inventory market:
1) As noted
earlier, with the frenzied market, more sales have been occurring off-MLS, and
these homes usually won’t show up as new listings in the public inventory of listings for sale. (The
Pros & Cons of Off-MLS Listings
Annual sales of TIC units and 2-4 unit buildings have plunged in the last 7
years by over 500 sales, a substantial drop in an overall market of San
Francisco’s size. This is probably due mostly to substantive changes in SF tenant eviction
and condo conversion laws. (Note: TIC units are a property type found virtually
no place else but the city.)
3) With extremely
high rental rates and extremely low mortgage interest rates, a small but
growing percentage of homeowners, who typically would have sold their homes, are
renting them out instead – and the Airbnb vacation-rental phenomenon (with even
higher rent rates) can only be adding to this. (Renting
vs. Selling One’s Home
) As a subset of this issue, some homeowners who have
to move, but hope or plan to move back to the city someday, are fearful that if they sell their SF home now, they will never be able to afford buying another home here upon their return.
Unless they’re moving out of the area to a place where the market is less competitive and homes are significantly less expensive, some potential sellers are so daunted by
the challenge of finding new homes within the city under existing market conditions, they are
simply staying put until things calm down.
A sizeable percentage of our new (mostly very high-end) condos are being
purchased as second homes by the locally affluent or as investments by foreign
buyers. These non-resident buyers add to demand and help soak up supply, and for
a number of reasons, may not sell as often as typical homeowners.
6) With the Bay Area jobs market so strong - it's the strongest in the nation - fewer people are relocating for new jobs elsewhere. They're finding them here instead.
many counties other than San Francisco, the big decline in distressed property
sales has affected inventory and sales. This does not apply to the city, which was never hammered by the subprime loan/ foreclosure crisis like many other places.
factors above are all probably diminishing listing inventory to greater or
lesser degrees, but ultimately, it’s not that the annual number of new listings
– i.e. the number of homeowners selling – is so drastically low by historical
measures. It’s the relationship between
supply and demand that
fundamentally determines market conditions, and for the last 3 years, a relatively stable supply has become
terribly inadequate to a dramatically escalating demand.
of course, is the classic dynamic which puts upward pressure on home prices.
(As an aside: One idea that has been suggested as a factor by some commentators makes no sense to us, i.e. people aren't selling, because their homes have appreciated above
the $250,000 (for single owners) or $500,000 (for couples) capital gains taxes exclusion on the profit on the sale of a primary residence. Three questions come to mind: 1) You and your spouse will happily make a $600,000 profit on the sale of your home, but you're not going to sell because it will be subject a whopping 2.5% tax rate ($500k exclusion; 15% long-term capital gains tax on the extra $100k)? 2) What is the alternative, to wait until the market crashes so your profits fall beneath the $500k threshold, thus making less profit, but paying no taxes? 3) Wouldn't it make more sense to take your $585,000 net profit after taxes, and invest it in a new
home, which will have a new
$500,000 capital gains exclusion when you, hopefully, sell it for a profit down the road? Admittedly, maybe we're just missing something in the logic.)
These analyses were made in good faith with data from sources
deemed reliable, but they may contain errors and are subject to revision. All
numbers should be considered approximate. Please contact us with any questions or
© 2015 Paragon Real Estate Group