The High End of the Market Isn't Immune After All

Zillow recently published its latest Homeowner Confidence Survey. According to the results, 70% of western region homeowners believe their homes lost value during the last year. Evidently, perception is catching up to reality, but there is still a sizable gap. Zillow estimates that, in fact, 90% of western region homes lost value. And judging from the Case Shiller indexes, the loss of value was substantial. Only one western market (Denver) fell by less than 10%, and five of the eight markets fell by 25% or more. The Zillow survey suggests, in other words, that at least 20% of western region homeowners are in a state of denial.

Some of those mistaken homeowners may live in San Francisco's high-end neighborhoods. Once a week, I hear someone say, "Sure, prices are falling, but the high-end of the market is holding up." I'm not sure why people are so determined to believe that, but it turns out that it's not true. Take a look at the chart, below, which shows an index of median prices for single-family homes in two of San Francisco's real estate districts.

The blue bars represent District 7, which comprises some of the City's most expensive neighborhoods, including Pacific Heights, Cow Hollow, and the Marina. The purple bars represent District 10, which comprises some of the City's least expensive neighborhoods, including Bay View, Excelsior, and the Outer Mission. Both data series are indexed to a value of 100 in 2000.

Contrary to popular belief, high-end prices have in fact fallen, by about 8% between 2007 and 2008. What's more interesting, however, is that on a cumulative basis, the high-end neighborhoods haven't done any better since 2000 than the low-end neighborhoods. The low-end neighborhoods have given up more of their gains recently, but those gains were much larger to begin with.

Another way to show the similarity between high- and low-end neighborhoods (at least as far as market performance) is by considering sales volumes. Take a look at the chart, below, which shows an index of sales volumes for the same two districts as before.

Once again, the blue bars represent District 7 (high-end) and the purple bars represent District 10 (low-end). In this case, however, each series is indexed so that its average value over the 15-year period is 100.

Except for a couple of years in the mid-1990's, the two indexes have tracked each other closely. In particular, both indexes peaked in 2004 and have declined by 30%-35% since then. (It's noteworthy that low-end sales volumes actually rose slightly in 2008.)

It seems, then, that the high-end neighborhoods are not a class unto themselves, but are, in fact subject to the same economic factors that affect the rest of San Francisco. Nonetheless, many homeowners in these neighborhoods remain convinced that their homes are special. Zillow's survey results contain a striking (and funny) illustration of this aspect of human nature. 48% of homeowners think their local markets will decline in the next year, but only 30% believe the same will happen to their own homes.

Note: The supposed immunity of high-end neighborhoods looks like a reincarnation of an earlier piece of wishful thinking, namely, the suggestion that a weakened US dollar would induce wealthy foreigners to prop up the San Francisco housing market. No doubt, the proponents of that theory were thinking about the high-end of the market.