The S&P Case-Shiller High-Tier Home Price Index
for the San Francisco Metropolitan Area
and How It Applies to the City of San Francisco Itself
The Paragon Real Estate Group Update
Note: The numbers on the 2 charts below are based upon the January 2000 value of homes being calculated at 100. Thus the number 144 signifies a value 44% above that of January 2000; the number 184 signifies 84% above January 2000. However, a decline from 184 to 144 equals a 22% decline in value from one point to the other.
Before trying to apply Case-Shiller Index trends to specific cities, neighborhoods and homes -- which can be deeply misleading -- please read the explanation of how the Index works, which is below the charts.
The Case-Shiller Index Deciphered
For the San Francisco (City & County) Real Estate Market
The S&P Case-Shiller High Tier Home Price Index is based upon their analysis of higher priced (lately starting in the range of $550,000 to $610,000) home sales in the 5-county Metropolitan Statistical Area (MSA) comprised of San Francisco, Marin, Contra Costa, Alameda and San Mateo counties. There are several different Case-Shiller indices for the MSA, but it is the High Tier Price Index which is most applicable for housing values in the city of San Francisco itself.
Here are some important points to remember about Case-Shiller:
Reviewing the Index is like looking in the rearview mirror – the Index comes out two months after the month being analyzed, and that Index reflects a 3-month moving average. Any month's closed sales generally reflect market activity in the two months previous to it: for example, we get the December report in late February: December's Index reflects the 3-month average for October, November and December, which reflects accepted offer activity in August through November. So in late February we're getting a snapshot of the market 4-7 months ago. Market conditions can significantly change within such a time period.
The main C-S Home Price Indices track price trends for houses only -- condos, co-ops, TICs and multi-unit buildings are NOT included. San Francisco contains only 12% of the house inventory in the Metro Statistical Area (MSA), so the aggregate Index is heavily skewed toward the other counties’ markets. Market conditions can vary widely between counties and indeed between neighborhoods within counties. San Francisco measures about 49 square miles; the 5-county area is over 2000 square miles. To drill down more locally, within the city, Pacific Heights is about 5 blocks away from the Western Addition neighborhood; the average dollar per square foot in the first is about $800 and in the second, about $450 -- a 77% difference within a 6 block area. Putting Pacific Heights or Russian Hill or Cole Valley in the same statistical-analysis basket as Pinole, Martinez and San Bruno is even more problematical.
Furthermore, Case-Shiller tracks not only overall aggregate house prices, but price trends broken into 3 price tiers: low, middle and high -- dividing the total number of sales into thirds. And the conditions and trends in these different price segments have been very different over the past few years.
Case-Shiller’s high-tier price index is the one that applies to the city best, but it doesn’t apply all that well. For the 5-county San Francisco Metro Area, the top third of sales in January 2012 started at a sales price of $550,000. But if we divide the city’s house sales of the past 12 months into thirds, $550,000 would be near the top of the city's lowest third; the city’s upper third of sales doesn’t begin until $860,000. (And if we took our less affluent southernmost neighborhoods out of the equation, our upper third would start much higher than that.)
Nationally, as well as in the state, Bay Area and the city of San Francisco, the lower the price segment, the harder it has been hit by distress sales (bank-owned property and short sales). According to DataQuick, California zip codes with a median price below $200,000 have a foreclosure rate 9 times higher than zip codes with median prices of $800,000 and above. The greater the percentage of distress sales in a given neighborhood, the larger the decline in value over the past 3 to 5 years. Thus, though all areas have seen significant declines from peak values, the least affluent areas have been hit hardest with value declines and the more affluent neighborhoods have been least affected. San Francisco has many of the most affluent neighborhoods in the country.
Indeed, San Francisco, whose 8 central and northern districts currently have a median house sales price of approximately $850,000, should probably have its own “Upper High-Tier” Price Index, which would probably vary even further from the low price, middle price and aggregate Index results.
Looking at the second chart at the top of this article of the Case-Shiller Index High Tier price points in January of each year since the year 2000, we see the large, fast appreciation to peak values in 2006 - 2008 (different neighborhoods of the Bay Area and the city peaked at different times within that time period); then, after the September 2008 financial markets crash, there was an 18% - 22% decline to January 2009. That seems generally correct as an overall average for the price adjustment that occurred in San Francisco's 8 central and northern districts. (We'd typically estimate the range of decline at 15% to 25% depending on the neighborhood in these districts.)
As seen in the third chart, the scale of the difference in impact on the respective price segments and on their associated areas of the Bay Area is enormous. The aggregate Index typically quoted in news articles and blogs vastly overstates the decline in values for most of San Francisco, and often misrepresents current trends as well. (The 2 southern SF districts, dominated by sales in the upper-low and mid price tiers and hard hit by distress sales, saw declines typically running from 30% to 45%.)
The San Francisco market is currently, in early 2012, undergoing a strong recovery: inventory is at historic low levels; buyer demand is at historic high levels; at least in many of the city's neighborhoods, this is creating significant upward pressure on prices. (For example, in the city's greater Noe Valley area, median home sales prices are now higher than at any time since the peak market in 2008.) Based upon what we’re seeing in the city market, both statistically and in the hurly burly of deal-making -- i.e. an improving employment picture (especially surging high-tech employment and wealth), a significant tightening in the supply and demand dynamic within SF, rapidly rising apartment rents and incredibly low mortgage interest rates -- we believe that the San Francisco home market hit bottom in 2009-2010, and reached the turn-around point in 2011. Please note that it is not unusual for the San Francisco market to begin its turnaround well before other areas of the Bay Area, state and country -- and we think this is what is happening now. However, because SF is only a small part of the Case-Shiller 5-county MSA, the C-S Index is not reflecting its market conditions -- we are very clear that San Francisco home values did not plunge in January 2012. Indeed, quite the contrary.
The bottom line is that there is only one way to assess value and value changes for a particular property and that is to perform a detailed comparative market analysis specific to its location, construction quality and condition, curb appeal and amenities. Sadly, the Case-Shiller Index is of virtually no help in performing that analysis.
For a more complete overview of market statistical trends in San Francisco, there are links to additional analyses below. Further information on the data points and methodology of the S&P Case-is publicly available on the S&P website.
Statistics are generalities, subject to fluctuation due to a variety of reasons. All information herein is derived from sources deemed reliable, but may contain errors and omissions, and is not warranted. The Case-Shiller data referenced above is from their non-seasonally adjusted Indices. The price ranges of the tiers adjust to a small degree each month depending on sales: lately the high tier has started at $550,000 to $600,000.
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