Real Estate Investor

Property market shifts gear New high-end condos change the market

Supply and demand still has the final say, even in San Francisco’s wild real estate market.

Early this month, developer Trumark Urban is expected to begin selling a batch of units in its $200 million luxury condominium project, The Pacific, located at 2121 Webster Street in Pacific Heights. A walk or drive along Market Street in the Castro shows many new and under-construction condo projects lining the street. SoMa has been home to numerous tall cranes building even more housing units in recent years. In another part of the market, there are potentially tens of thousands of “in-law” units, or accessory dwelling units, that could come onto the market in the near future if a new pact between supervisors Mark Farrell and Aaron Peskin becomes reality and boosts generation of new such units (see News Briefs, page 3).

People who have wondered when all of the new construction would begin to reduce housing prices are finally getting an answer: Now.

It’s not a dramatic drop, and it’s not even affecting all property types. Currently it is being felt on high-end properties, and even there, it is reflected in longer times before properties are sold and some not-too-dramatic price decreases. But combined with some softness in the high-paying tech market — where hiring has taken a breather over the last year and some venture capitalists have become pickier about shoveling their millions at unprofitable startups — these developments could auger well both for people looking to buy a home here and for people fretting about the city’s continuing shortage of housing.

Local business headlines are starting to shift from stories about the latest eye-popping prices commanded by home sales to tales of a “condo glut, with massive supply and dwindling demand” and “market softening, but only for super rich.”

This past May, home prices in San Francisco were basically unchanged from the previous May, according to online real estate service Redfin. Sales volume dropped almost 9 percent, falling for the fifth month in a row. Redfin also reported that the supply of homes — the inventory of available properties for sale — increased by 50 percent, “reaching its highest level in more than three years, as more homeowners put properties [up for sale] in an effort to catch prices at a peak.”

In particular, the supply of condominium units for sale has increased by 70 percent from May 2015, reaching its highest level in four and a half years. Not surprisingly, the prices for condos dropped 5.6 percent from May 2015 to May 2016, more than five times the price decline for single-family homes. Redfin agent Mark Colwell said that the increased inventory is due to the newly constructed condominiums coming online and from sellers wanting to sell while the selling is good. “The only significant slowdown is in luxury condominiums, where a fair number of homes have come online,” said Colwell. “It’s not a flood, especially not relative to the jobs being created, and we’re still seeing multiple offers on homes that are priced correctly.” He said that sellers with “unrealistic price expectations” are seeing their units sit on the market longer.

That’s a big switch from the go-go days of recent years past, when it was not unheard of (actually, it was heard quite often) that a home would sell within hours or days of being put on the market, and sometimes it would even be snatched up before being made publicly for sale. What we’ve seen so far this year is a move “toward market normalization,” notes real estate firm Pacific Union. It said that sales continued to be strong, albeit with longer on-sale times “especially in the city’s northern neighborhoods and popular Noe Valley. One main reason for this is that many sellers entertained unrealistic expectations and, accordingly, overpriced their homes. Consequently, bidding wars occurred less frequently than in the second quarter of last year, and price reductions became more commonplace.”

Pacific Union’s market update reported a slower pace of sales in 2016’s second quarter than a year earlier, though not significantly: “At the high end of the market, many move-up buyers stayed put, uncertain if their existing home would command enough to allow them to afford their target home. All in all, while the San Francisco market remains tilted in favor of sellers, it is slowly moving toward a more balanced state.”

In its own recent market report, Paragon Real Estate Group noted that new housing construction “has not been adequate to the city’s needs over the past 35 years.” It notes that nearly half — 49 percent — of the city’s housing was built before 1940; an increase in the city’s population during the Second World War did spawn a building boom, but that steadily fell over ensuing decades until it lagged way behind population movement for much of the final few decades of the last century. “The current feverish boom in home construction has been quickly gathering steam only in the [past] couple years,” adds

Paragon, “however, as increasing volumes of new-construction units come on market, it may significantly alter the supply and demand dynamic that has prevailed 2012-2015…. [S]ince the mid-1990s, the units being built are typically 1- or 2-bedroom condos or apartments, instead of 2-or 3-bedroom houses, [so] the new housing units being added accommodate fewer people per unit.”

Buyers looking for these types of properties will probably start paying more attention to home listings, looking for bargains. Redfin noted that the expanded inventory “means more choice and bargaining power for house hunters, but the supply of properties on the market still hasn’t caught up with the demand, especially from buyers who want single-family homes.”

Again, nothing dramatic has changed in the market, and homes that were selling for $2.5 million last month won’t be selling for $450,000 next month. Even with the cooling-off in the tech sector, employment remains strong in the city, which is enjoying record-low unemployment. Interest rates remain low and the economy is still in recovery mode. So the changes we are seeing today in the high-end condo market is mostly due to old trusty supply and demand.

Pacific Union expects further “trending toward market normalization throughout the rest of the year, even when adjusted for the typical late-summer slowdown,” and it noted that that pace could be affected by international events, such as further effects from the Brexit vote or the performance of China.

Paragon calculates that the San Francisco real estate boom has a couple years to go before heading to an “adjustment” phase. It reports that two of the last three recoveries didn’t adjust until there had been 100 percent appreciation in prices among high-end homes; the current appreciation for such homes is between 65 and 75 percent since the nadir of prices in 2012. The previous recovery was cut short at only 59 percent appreciation by the start of the Great Recession. With no broad economic collapse on the immediate horizon, we might still have a way to go to ride out this boom.

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John Zipperer is a former senior editor of Affordable Housing Finance and Apartment Finance Today. E-mail: [email protected]