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Will home prices in the San Francisco market continue to increase?

Bin He    |    Housing Trends

Home prices in the San Francisco area have been rapidly increasing since early 2012, reaching year-over-year appreciation rates of more than 20 percent in early 2013. Since then, home prices have continued to increase but at a slower pace. Figure 1 shows the CoreLogic Home Price IndexTM (HPI) and year-over-year change for the San Francisco market. It shows that the HPI has surpassed pre-crisis levels and continues to climb. The year-over-year appreciation rate remained above 10 percent for the first three months of 2015, which is considerably higher than the 5 percent appreciation in the U.S. index.

An analysis of CoreLogic data on homes listed for sale and those that have sold shows some of the forces that have driven prices higher in the San Francisco Core Based Statistical Area (CBSA). Figure 2 compares the final sale price to the initial list price, indicating the premium or discount paid relative to the initial list price. It appears that buyers, on average, were taking more than a 6-percent discount in 2009. However, in 2014 and so far in 2015, they have been paying between a 1 percent and 5 percent premium, which indicates buyers are bidding up prices in the San Francisco market. In a buyer’s market, we would expect greater discounts on a sold property, and in a seller’s market, we would typically see multiple offers, and even offers above the initial list price.

Another field that can shed light on the state of the San Francisco housing market is the months’ supply of inventory, which measures the number of months it would take to sell the existing inventory of homes at the current speed of sales. Figure 3 shows that since 2013 the months’ supply has averaged only a couple of months. With such a low inventory-to-sales ratio, upward pressure on home prices is expected to continue.

Even though sales have remained constant, the active listing inventory in the San Francisco area was down 69 percent over the four-year period from Q4 2010 to Q4 20141. This supply-demand imbalance is exerting upward pressure on home prices. Figure 4 shows the median price for both active listings—existing listings that are active during the indicated month—and new listings, which are homes that are added during the indicated month. Although both listing prices are at their peaks since 2007, properties in the San Francisco area are selling very quickly with sold properties off the market within an average of 30-45 days, as Figure 5 shows.

In spite of recording continued rising home prices over the last few years, the current realities of bidding wars, tight supply and consistently low days-on-market sales cycles all point to home prices continuing to increase in the San Francisco market, at least for the short term.

[1] CoreLogic ListingTrends, active listing inventory and sold listing inventory.

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