A Temperature Gauge for the San Francisco Real Estate Market

How is the San Francisco real estate market doing? Unfortunately, that can be a difficult question to answer. Take a look at the chart, below, which shows historical sale prices for two-bedroom condos.

I'd summarize this chart by saying that prices plateaued in the summer of 2005, and haven't shown any obvious trend since then. So much for the last three years, you say, but what about the last three months? Consider the chart, below, which shows the annual rate of change for two-bedroom condo prices.

Unfortunately, I find this chart even more difficult to summarize than the first one. If you asked me how the market is doing and this was all I had to go on, I'd probably wind up reading data points straight from the chart. That doesn't seem helpful, particularly if you're not interested in two-bedroom condos. There must be a better way to characterize the state of the market.

You may remember that when the housing frenzy was at its peak, overbidding and multiple-offers were common. Take a look at the chart, below, which shows the percentage of two-bedroom condos that were sold above the asking price.

I've also included the change in average sale price (taken from the second chart, above). The two series track each other fairly closely, which suggests that either one can be used as a proxy for the other. The advantage of focusing on bidding activity instead of price changes is that it provides a cleaner snapshot of the market.

If I say that prices have fallen 5% in the last three months, you'll probably want to know how much they changed in the three months before that. Or maybe you'll want to know the level from which they started, and whether I believe that that level was appropriate. Pretty soon, we'll be far afield from the original question, which was, "How is the market doing?"

Okay, here goes: During the last few months, only about 20% of the housing units sold in San Francisco have gone for more than the asking price. In contrast, when the dotcom and housing bubbles were at their peaks, 80% of sales were for more than the asking price. Except for a few months following September 11, 2001, the recent rate of over-bidding activity is at its lowest level in the last ten years.

In other words, the San Francisco housing market has cooled dramatically.