Diablo Valley & Lamorinda Real Estate Looking Back on 2018

There were almost too many local, national and international political, economic, social and ecological factors impacting the 2018 market to count. In the first half of the year, market conditions were very hot, and there were strong year-over-year appreciation rates. Come summer/early autumn, real estate and financial markets began to shift distinctly cooler. Looking at 2019, there are many wild cards whose impacts are difficult to predict: extremely volatile financial markets, fluctuating interest rates, contentious national politics, international trade issues, spiraling debt levels, employment growth – and a dramatic surge of local high-tech unicorns that plan to go public, which could create a tsunami of new wealth in the Bay Area.

Annual Median Home Sales Prices

In 2018, the median house sales price increased by 5.2% or $65,000.

Quarterly Median Price Changes

On a quarterly basis, the median house sales price peaked in Q2 and then declined in Q3 & Q4: Note that this is not an uncommon dynamic in previous years as well. The percentage year-over-year quarterly appreciation rate (second chart below) has been stepping down since late last year, but remains positive.

Home Sales Breakdowns

Appreciation Trends by City

Below are appreciation trends for 8 of the 9 communities we include in the Diablo Valley and Lamorinda newsletter. Diablo is not charted because it has so few sales that its median sales price jumps up and down on annual basis without much reference to changes in fair market value. However, Diablo typically has the highest median house sales price in the region.

Luxury Home Sales

Selected Market Indicators

Many of the market indicators reflect the huge role seasonality plays in the market, whether measuring inventory or demand. Conditions have definitely cooled since the height of the spring selling season, as is common, but many of these statistics do not show dramatic changes from recent historical trends. However, price reductions and expired, no-sale listings have increased, and the sales price to original list price percentage has dropped, clearly indications of some changes occurring. December and January are the two lowest-activity months of the year, and we will probably have to wait until the early spring market begins for more insight into where the market is heading.

After climbing significantly through November, interest rates have been dropping since then, through the first week of January, which is good news for both buyers and sellers. However, rates are still much higher than the lows seen in the last few years.

© Compass 2019  All Rights Reserved by Compass  Made in NYC

Compass is a licensed real estate broker (01991628) in the State of California and abides by Equal Housing Opportunity laws. All material presented herein is intended for informational purposes only. Information is compiled from sources deemed reliable but is subject to errors, omissions, changes in price, condition, sale, or withdraw without notice. No statement is made as to accuracy of any description.

30+ Years of Bay Area Real Estate Cycles

The CoreLogic S&P Case-Shiller high-price-tier Home Price Index for the 5- county San Francisco Metro Area, illustrated above by the blue line, applies best to more expensive Bay Area housing markets such as most of San Francisco, Marin, San Mateo and Diablo Valley/Lamorinda. The SF Metro low- and mid-price tiers had much more dramatic bubbles and crashes in 2005-2011, but as of December 2017, have ended up at points a bit higher than the high-price tier. The green line tracks home price appreciation for the United States as a whole. The Case-Shiller Index is predicated on a January 2000 price of 100. “250” signifies a price that has appreciated 150% since January 2000.

Financial-market cycles have been around for hundreds of years, from the 1600’s Dutch tulip mania through our recent speculative frenzy in crypto-currencies. Though cycles vary in their details, their causes, effects and trend lines are often similar, providing more context as to how the market works over time.

Human beings have always been worried about (or terrified of) the future, and going back many thousands of years, we have constantly attempted to predict what it holds. However, 2018 © Compass whether using priests, oracles, astrologers, economists, analysts or media pundits, we show no aptitude as a species for having the ability to do so with any accuracy. In 2012, a NobelPrize-winning economist, famous for housing market analysis, said that the U.S. real estate market might not recover “in our lifetimes.” In hindsight, we now know that the recovery had already begun in some markets such as San Francisco. In 2015, during a period of financial market fluctuations and a slowdown in our local high-tech boom, a very well-respected Bay Area economist predicted that there would soon be “blood in the streets of San Francisco.” But then housing and stock markets soared higher and the high-tech boom dramatically strengthened again. (He has since postponed the arrival of blood until 1919 or 1920.)

Our smartest experts can’t get it right, much less the thousands of glib, confident forecasts by utterly unqualified individuals reported on in the media every month. We can’t even remember the mistakes of the recent past – one reason why we don’t seem to be able to escape the curse of recurring cycles – much less foretell what’s going to happen tomorrow. Which leads to the next point.

It is extremely difficult to predict when different parts of a cycle will begin or end. There is no rule regarding how long the different parts of a market cycle will last. Boom times, even periods of “irrational exuberance,” can go on much longer than expected, or get second winds, with huge jumps in values. On the other hand, negative shocks can appear with startling suddenness out of nowhere, often triggered by unexpected economic or political events that hammer confidence, adversely affect a wide variety of market dominos, and then balloon into periods of decline and stagnation. These negative adjustments can be in the nature of a bubble popping, the slow deflation of a punctured tire, or some combination of the two.

Going back many decades, all the major Bay Area recessions have been tied to national or international economic crises. Considering the fundamental strengths of the local economy, absent a major natural disaster, it is unlikely that a major downturn would occur due simply to local issues. However, local issues can exacerbate a cycle: The 1989 earthquake intensified the effects of the national recession in the early 1990’s; our greater exposure to dotcom businesses produced a spike up and down with the NASDAQ bubble & 2000-2001 crash; and our current, raging high-tech boom has poured fuel on our up-cycle during the current recovery.

All bubbles are ultimately based on irrational exuberance, runaway greed, criminal behavior, or all three mashed up together. Whether exemplified by junk bonds, stock market hysteria, gorging on debt, a corporate Ponzi-scheme mentality, an abandonment of reasonable risk assessment, and/or incomprehensible and dishonest financial engineering, the bubble is relentlessly pumped bigger and tighter.

However, it should be noted that the 2008 crash was abnormal in its scale, and much greater than other downturns going back to the Great Depression. The 2005-2007 bubble was fueled by home buying and refinancing with exorbitant, unaffordable levels of debt, promoted by predatory lending practices such as deceptive teaser rates, no-down-payment loans and an abysmal decline in underwriting standards. The market adjustments of the early 1990’s and early-2000’s saw declines in Bay Area home values in the range of 10% to 11%, as compared to the terrible 2008 – 2011 declines of 20% to 60%. (Bay Area prices are now above their 2007 peaks.)

Whatever the phase of the cycle, many people think it will last forever. Going up: “The world is different now, profits don’t matter, and there’s no reason why the upward trend can’t continue indefinitely.” And when the market turns: “Homeownership has always been a terrible investment and the market will not recover for decades.” But the economy mends, the population grows, people start families, inflation accumulates over the years, and the 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 jumped back in – or “exploded” might be a better description – and home prices started to rise again. Then kept rising as consumer confidence returned; ultimately moving into over-confidence and irrational exuberance. The nature of cycles is to keep turning.

As long as one doesn’t have to sell during a down cycle, Bay Area homeownership has almost always been a good or even spectacular investment (though admittedly if one does have to sell at the bottom of the market, the results can be painful). This is due to the ability to finance one’s purchase (and refinance when rates drop), certain tax benefits, the gradual pay-off of the mortgage (the “forced savings” effect), inflation, and long-term demographic and appreciation trends.

The best way to overcome cycles is to buy a home for the longer term, one whose monthly cost is readily affordable for you now, ideally using a long-term, fixed-rate loan, while keeping an adequate financial reserve for emergencies – and then resisting the urge to use your home as an ATM during times of significant appreciation. If one keeps to those rules, then it usually true, quoting a NYT editorial, “Renting can make sense as a lifestyle choice… As a means to building wealth, however, there is no practical substitute for homeownership.”

Compass is a real estate broker licensed by the State of California, DRE 01527235. Equal Housing Opportunity. This report has been prepared solely for information purposes. The information herein is based on or derived from information generally available to the public and/or from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy or completeness of the information. Compass disclaims any and all liability relating to this report, including without limitation any express or implied representations or warranties for statements contained in, and omissions from, the report. Nothing contained herein is intended to be or should be read as any regulatory, legal, tax, accounting or other advice and Compass does not provide such advice. All opinions are subject to change without notice. Compass makes no representation regarding the accuracy of any statements regarding any references to the laws, statutes or regulations of any state are those of the author(s). Past performance is no guarantee of future results.

The Multi-Unit Residential Property Markets of San Francisco, Alameda & Marin Counties

The big political issue facing the market is CA Prop 10, which, if passed in November, repeals the limits on local rent control laws enacted in the Costa-Hawkins Rental Housing Act. This would almost certainly have negative ramifications for owners of multi-unit residential properties in San Francisco and Oakland. The CA Legislative Analyst Office does a good job summarizing the issues: Prop 10 Review. Prop 10 is currently creating something of a shadow on the larger apartment building market, with some buyers waiting for election results – much as happened with SF Prop G did in 2014. (Prop G failed and the market rallied dramatically after Election Day.) However, the market certainly did not grind to a halt in Q3, nor did values plunge.

Historically speaking, it has been difficult for rent control measures to pass on a statewide basis, because homeowners, all of whom are potential landlords, outnumber tenants in California. On this issue, people tend to vote their financial interests, and homeowners generally vote in higher percentages than tenants. Strong rent-control measures are generally found only in tenant-majority communities. All of which is not to take for granted what will occur on November 6.

This report generally separates out the 2-4 unit and the 5+ unit apartment building markets, since they have different dynamics and values. All the statistics herein are broad generalities covering a wide variety of buildings of very different location, age, size, quality, condition, tenant profile, income and income potential. The number of sales in many of the segments is relatively small, which can make the statistics more prone to anomalous fluctuations.

Some charts pertain to multiple counties, and others drill down on statistics specific to San Francisco; some track the last 12 months of sales, and others have a final data point reflecting 2018 YTD sales. All numbers should be considered good-faith, general approximations.

Trends in Residential Rents

This chart below tracks longer-term average asking rent trends, instead of median asking rent appreciation since 2012, as illustrated in the charts above. It provides a bit more historical context.

Sales, Prices & Market Trends

2-4 Unit Buildings

5+ Unit Buildings: Inventory, Sales & Values

The inventory of active listings ticked up in the last 2 quarters.

SF 5+ Unit Buildings: Trends in Gross Rent Multiple,
Cap Rate & Dollar per Unit Value

Many of the standard value parameters have remained remarkably
consistent in San Francisco over recent years.

San Francisco New Construction Pipeline

Almost 70,000 housing units are now in the SF new construction pipeline. Plans are constantly being added, revised and abandoned, and new housing construction is extremely sensitive to changes in economic conditions.

Q3 2018 Sales of San Francisco 5+ Unit
Apartment Buildings

San Francisco is a unique residential-investment market: the buildings are smaller and older than in most places, built in a wide range of architectural styles. The great majority of the market is under rent control, which makes upside rental-income potential a big component of valuation, even if it is unknown when that potential might be realized. Within the city the variety in buildings and units is enormous.

In real estate, the devil is always in the details: If you are interested in further insight into the details of any of the above sales, or regarding properties currently on the market, please contact me.

Broker Performance in
Residential Multi-Unit Property Sales

In the summer of 2018, Paragon and Pacific Union merged into Compass to create the largest residential investment property brokerage in San Francisco.

It is impossible to know how median and average value statistics apply to any particular apartment building without a specific, tailored, comparative market analysis. Statistics are generalities: This is especially true for multi-unit properties, with the enormous range of property types, sizes, conditions, circumstances, qualities, financial data and locations. We are often dependent upon listing agents for income and expense details, which can be of varying accuracy. A percentage of investment property sales are not reported to MLS, which sometimes limits our ability for more comprehensive data analysis.

Compass is a real estate broker licensed by the State of California, DRE 01527235. Equal Housing Opportunity. This report has been prepared solely for information purposes. The information herein is based on or derived from information generally available to the public and/or from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy or completeness of the information. Compass disclaims any and all liability relating to this report, including without limitation any express or implied representations or warranties for statements contained in, and omissions from, the report. Nothing contained herein is intended to be or should be read as any regulatory, legal, tax, accounting or other advice and Compass does not provide such advice. All opinions are subject to change without notice. Compass makes no representation regarding the accuracy of any statements regarding any references to the laws, statutes or regulations of any state are those of the author(s). Past performance is no guarantee of future results.

© 2018 Compass

CoreLogic S&P Case-Shiller Home Price Index Update

The CoreLogic S&P Case-Shiller Home Price Index does not evaluate median sales price changes, but employs its own proprietary algorithm to measure home price appreciation over time. Since its indices cover large areas – for example, the San Francisco Metro Area is comprised of 5 counties – which themselves contain communities and neighborhoods of widely varying home values, the C-S chart numbers do not refer to specific prices, but instead reflect prices as compared to those prevailing in January 2000, designated as having a value of 100. Thus a reading of 250 signifies that home prices have appreciated 150% above the price of January 2000 (with its reading of 100).

Case-Shiller divides all the house sales in the SF metro area into thirds, or tiers. Thus the third of sales with the lowest prices is the low-price tier; the third of sales with the highest sales prices is the high-price tier; and the third in between is the mid-price tier. The price ranges of these tiers changes as the market changes. The 3 tiers experienced dramatically different bubbles, crashes and recoveries over the past 18 years, to a large degree determined by how badly the tier was affected by the subprime financing crisis. The low price tier was worst affected – huge bubble, huge crash, most dramatic recovery – and the high-price least affected (but still deeply affected).

Most of the house sales in expensive counties such as San Francisco, Marin and San Mateo, as well as affluent communities in other Bay Area counties are in the “high price tier”, and that is where we focus most of our attention. In fact, much of the house market in San Francisco and other very expensive markets would qualify for an “ultra-highprice
tier,” but C-S does not break that out. All counties, to some degree, have sales in all 3 price tiers.

The Index is published 2 months after each month delineated – the July index was released in late September – and reflects a 3-month rolling average, so in effect, it is looking into a rear-view mirror at the market 3 to 5 months ago.

The 5 counties in our Case-Shiller Metro Statistical Area are San Francisco, Marin, San Mateo, Alameda and Contra Costa: Alameda and Contra Costa are by far the largest markets; SF itself comprises only about 7% of house sales in the metro area. We believe the Index generally applies to the other Bay Area counties as well. There are many dozens, if not hundreds, of unique real estate markets found in such a broad region, with different dynamics, moving at varying speeds, sometimes even moving in different directions. How the C-S Index applies to any particular property is impossible to say without a specific comparative market analysis.

More information: https://us.spindices.com/index-family/real-estate/sp-corelogic-case-shiller

S&P Dow Jones Indices LLC, S&P/Case-Shiller U.S. National Home Price Index [CSUSHPINSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CSUSHPINSA, September 25, 2018.

Compass is a real estate broker licensed by the State of California, DRE 01527235. Equal Housing Opportunity. This report has been prepared solely for information purposes. The information herein is based on or derived from information generally available to the public and/or from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy or completeness of the information. Compass disclaims any and all liability relating to this report, including without limitation any express or implied representations or warranties for statements contained in, and omissions from, the report. Nothing contained herein is intended to be or should be read as any regulatory, legal, tax, accounting or other advice and Compass does not provide such advice. All opinions are subject to change without notice. Compass makes no representation regarding the accuracy of any statements regarding any references to the laws, statutes or regulations of any state are those of the author(s). Past performance is no guarantee of future results.