Deterioration of the High End Housing Market

The Chronicle ran a front page story about the Bay Area housing market in Sunday’s paper. The gist of the story was that the high end of the market is showing signs of distress, and is beginning to deteriorate.

The article was partially correct: there has indeed been a notable change in the high end of the market, but it’s premature to attribute that change to distress. And it’s inaccurate to claim that the high end of the market has only recently begun to deteriorate.

Let’s start with what’s happened recently. Take a look at the chart, below, which shows historical listing activity for single family homes in District 7 (which is a good proxy for the high end of the San Francisco market).

The blue bars indicate the number of new single family home listings in each year. (The figure for 2009 was obtained by annualizing year-to-date listings through the end of April and applying a minor correction for seasonality.) The purple line indicates the median asking price for those new listings. Together, these series provide a historical overview of the supply side of the market.

After several years of restrained activity, listings in District 7 bounced back strongly in the first four months of 2009. Meanwhile, asking prices continued their recent downward trend. The latter observation suggests that the sharp increase in listing activity is being driven at least partially by recent economic turmoil, rather than any renewed sense of opportunity. Keep in mind, however, that the number of listings is high only in comparison with the last few years. When compared to pre-2005 levels, listing activity is merely average. So it seems premature to conclude that owners of high-end homes are suffering from financial distress.

So much for the supply side of the market. What about demand? Contrary to what the Chronicle article suggested, demand for high end homes has been deteriorating for at least two years. Take a look at the chart, below, which shows historical sales volumes for single family homes in District 7.

Sales volumes in District 7 have fallen in every year since 2004. As long as prices were rising, declining sales could be attributed to higher asking prices (i.e., tighter supply). When prices began to decline in 2007, however, it became clear that demand was declining as well. (See this earlier posting for a cartoon picture that lays out the reasoning.) The rate of deterioration appears to have accelerated in 2009, but it’s incorrect to suggest that demand is only now beginning to suffer.

The inventory of high end for-sale homes in the Bay Area has climbed significantly in the last year, and now exceeds a year’s worth of supply. The Chronicle seems to have attributed the higher inventory entirely to the sharp increase in listing activity. If the rest of the Bay Area is like San Francisco, however, the increase in listing activity has merely returned listings to a level that would have been considered normal a few years ago. It therefore seems premature to conclude that high end sellers are ‘distressed’. And by ignoring the steady fall in demand over the last two years, the article reaches an overly dramatic conclusion, namely, that distress has suddenly overtaken the high end of the market. The reality is less exciting than that.