Housing Bubble 2 Goes Nuts: San Francisco Home Sales Plunge 20%, Prices Soar 27%

Yves here. Wolf Richter is keeping tabs on the latest, peculiar housing bubble, in which real estate prices on the top end continue to rise into the stratosphere, while mid-range and cheaper properties languish. Nowhere has this pattern been more evident than in California and in particular, San Francisco.

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street

San Francisco is known for its mindboggling booms and breathtaking busts as the hot money from all over the world ebbs and flows amidst startup frenzies and IPO manias.

And now the hot money is flowing. It has created a delirious craziness in the housing market, surrounded by an environment where app makers without revenues but with big dreams and the word “disrupt” in their description are worth billions and draw so much cash from investors that they struggle harder to burn through it all than to disrupt anything.

So I read with fatalist amusement in SF Curbed that the most expensive home on the market in early November is still on the market. At the time, SF Curbed described it this way:

Raw food chef Roxanne Klein and her entrepreneur/guitar-CEO husband, Michael Klein, have put their neoclassical-revival mega-manse on the market for $39 million. The couple have only owned the seven-bedroom, 16,000-square-foot home, located at 2701 Broadway, for two and a half years, having picked it up from real-estate mogul Ron Zeff for $27 million back in 2012…. The ask is a full $12 million above the last sale price, though the present owners haven’t so much as changed the paint in the au pair suite.

Why fatalist amusement? The asking price is 44% higher than when the home was sold two-and-a-half years ago.

So Fed Chair Yellen, in her press conference after the FOMC meeting today, said she’s surprised that housing hasn’t recovered more than it has. But for those who were on the receiving end of the Fed’s free money, the housing market recovered just fine.

There’s only one problem: there aren’t enough of these folks, and they don’t like to live in median homes. But with each price increase, more and more people who want to buy a median home to live in are left behind. And homes sales tumble.

In the nine-county San Francisco Bay Area, sales in November of new and resale houses and condos dropped 10% from November last year, according to CoreLogic DataQuick. It was the worst November since crisis-year 2008. DataQuick blames the debacle on the “limited number of homes for sale, cautious buyers, a challenging mortgage market, and a quirk of the calendar….”

But with a median price of $601,000 in November, up 9.3% year-over-year, there aren’t that many people left who can afford to buy a home. And investors, fattened by Yellen’s monetary policy? They’re starting to lose interest. These “absentee buyers” purchased 18.6% of the homes, down from 20.4% in November last year, the lowest level since September 2010.

Sales volume was down in all nine counties year-over-year, topped by my crazy and beloved San Francisco where sales plunged 20%.

But … the median price soared, gulp, 27% from November a year ago – um, that’s not a typo – reaching a new all-time record of $1,072,500.

That’ll buy a 2-bedroom no-view apartment in a so-so area.

The peak of the prior housing bubble in San Francisco occurred in November 2007, based on the same DataQuick series, with a median price of $814,750. After it imploded so spectacularly, everyone acknowledged that it had been an out-of-whack bubble phenomenon. Everyone had anecdotes of craziness. Sanity would henceforth reign in San Francisco, they said. Now, exactly seven years later, the San Francisco median home costs 32% more than it did during that crazy bubble peak.

Only this time, it’s neither a bubble nor a peak. It’s just an insufficiently recovering housing market, according to Yellen. And so she’s surprised that, after six years of free money for certain folks, it hasn’t “recovered” even more.

In the six-county Southland, the nuances are different. November home sales dropped 19% from October and 9.5% from November a year ago, to the lowest level for any November in seven years. The sales debacle hit lower priced homes particularly hard. While sales of homes over $500,000 edged down 3.3% year over year, sales of homes under $500,000 dropped 17%. And sales of homes below $200,000 plummeted 35%.

“Fewer investor purchases and other market factors,” is how DataQuick explained the phenomenon.

The median sale price of $412,000 hasn’t budged much since August and was up only 7% from a year ago – “only” because it was the sixth month in a row of single-digit year-over-year increases, after 22 months of double-digit gains. Hence the sense of stagnation in a world where prices must always soar.

The problem is that “traditional buyers haven’t filled the void left by the investors who’ve pulled out.” At $410,000 for a median home, “affordability and mortgage availability remain as hurdles, as do concerns about job security and the direction of the housing market.” The bad breath of reality.

In the miracle city of San Francisco, the plunging sales volume and skyrocketing prices coincide with an enormous building boom. Midrise buildings are sprouting like mushrooms, and a few towers are popping up too. Some of these units have started to come on the market, with many more scheduled for 2015 and 2016. But housing bubbles that culminate in building booms implode with particular splendor and a lot of nefarious side effects.

“Mind-blowing” how the luxury market has been “completely on fire.” The rest, well. Read…   California Housing Market Cracks in Two, Top End Goes Crazy

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  1. Jim Haygood

    Having served as a prof at Berkeley since 1980 and headed the San Francisco Fed (2004-2010), Mr. Yellen had a front-row seat to watch the phenomena Wolf describes.

    That’s why the chair’s surprise that housing hasn’t ‘recovered more’ made me go, ‘WHUT?’ It’s reminiscent of George H. W. Bush’s first encounter with a supermarket checkout scanner in 1992:

    “This is for checking out?” asked Mr. Bush. “I just took a tour through the exhibits here,” he told the grocers later. “Amazed by some of the technology.”

    Mr. Yellen should get out more.

    1. Paul Tioxon

      Television, the answer is television. Couple with frequent channel surfing. Should be mandatory for those who meet and read way too much. You know, like throwing some Brussels Sprouts into the menu at dinner a few times a month.

  2. GuyFawkesLives

    Why would the bankers not follow through with Housing Crisis II, when the first one was the most profitable scam in history? Why would anyone think a sequel would not be far behind, especially when no one’s been stopped?

    To all the assholes who have stood by while their neighbors were foreclosed in the first crisis, fuck you.
    And to all the suckers who purchased during the sequel, I will help you for a LARGE FEE.

    1. susan the other

      And to all the many millions of foreclosed property new-owners: You will never ever have clear title. But that’s not Amerika’s problem.

  3. tastysharksnack

    I believe it. Some friends of mine, a young professional couple with a baby, just bought a 2-bedroom house in an ok part of the city for $850,000. It had been purchased about a year ago for about $650k then flipped. They’re both successful engineers and still had to borrow money from the parents for a down payment. Any other friends my age who bought a place were either trust fund babies or received a fat inheritance.

    I always scratch my head about this, but I think there’s just too little housing available and too much institutional and foreign money coming in to reverse the trend. The next tech crash will pause it a little, but the bubble always seems to keep inflating.

    1. Sam Adams

      It will continue until it stops. It’s a game of musical chairs, until the mega-McMansions are abandoned or redeveloped as semi-detached.

      1. GuyFawkesLives

        It will continue until the bankers have extracted all the middle class wealth.
        Only then, when we are ALL on the same plane, perhaps we can all go after the bankers and display their bloody heads on pikes in the middle of town square.

    2. Jim Haygood

      ‘They’re both successful engineers and still had to borrow money from the parents for a down payment.’

      Mortgage lenders now go through 2 or 3 years of bank statements, looking for unexplained deposits that might represent loans from relatives.

      The Justice Department probably would pay you a bounty for helping to nail them with a bank fraud rap. Just kidding … sort of.

      1. Uahsenaa

        Not necessarily; they could get away with giving 56k to the couple before having to pay gift tax (i.e. two parents x two people in married couple [4 x 14k exemption]). If they were only putting 10% down (which would require a second mortgage; a bad idea but still doable), then they would only need to cough up 29k themselves.

        The finance math makes sense, and avoids the IRS beating down your door.

        1. Jim Haygood

          You’re quite right about the need to structure it as a gift. But the quoted post said ‘borrow money from the parents.’

          It would never occur to most people that this could be a felony offense, if not disclosed on a mortgage app.

          1. Jim A.

            ISTR that this was a plot point in the show “The Wire.” They called it “The Headshot” because they could threaten most people with federal charges for it to compell their coöperation.

        2. ambrit

          “…the IRS beating down your door.”
          That says it all. Even the top tier professionals fear the wrath of the IRS, while the True Elites break any and every law with impunity.
          Neo-Feudalism is a working system now.

    3. Moneta

      In my view, it’s not that there are too few homes, it’s that everyone thinks they deserve better than average.

  4. Ben

    What would the expansion of M2 look like if real-estate lending had been flat from 1997 to present?

    Surely housing is the method of choice for the Fed to print money. So as long as this continues all productivity gains will always be soaked up by housing costs. This is why we’ve seen living standards stall whilst the banks boom.

  5. ptup

    I don’t get these responses. Did anybody read the column? Does anybody follow the market? Yellin is right, housing hasn’t “recovered”, nationally, if one considers rising back up to bubble pricing “recovered”. SanFrancisco, as always, and, the California market in general, is a freak show that has no comparison besides Manhattan. The state has had a ridiculous history for the last thirty years. SF is the most beautiful city in America with a very temperate climate and a fascinating culture. I and millions more would live there in a heartbeat, if they had the money. It’s an international trophy city, so, of course it has been bid back up, and, of course, it doesn’t hurt that the incredibly rich techno geeks live there, too.

    The rest of America hasn’t seen anywhere near this kind of roller coaster pricing. Millions of “homeowners” are still underwater on their loans, and millions more are treading water, feverishly. The institutional money dropped in in ’10 to bid a lot of markets up for a supposed rental return on a mass scale, but, they were their own worst enemy, and now they can’t afford the pricing in a lot of places that have now gone flat to even down a little. I doubt they found the rental business profitable or easy. It’s still really really hard to get a mortgage unless you have at least 20% down and have a solid job and work history. We all know that’s become more and more hard to find these days. I have a friend who just had to jump through hoops for a 3.7 30 year, and he can afford to pay cash, but, he’s self employed, for years. I just bought, and it was easy, because I put 25% down, and I’ve had a good job for six years. They actually ignored my pension income and other assets! It was like reverse sub prime.
    I’m convinced that, if the Fed didn’t focus on housing, we would be looking at a market that would be another 20% down, nationally. SF, Manhattan, Miami Beach, and a lot of the best neighborhoods in some other cities would be OK, those people can pay cash. But, the rest of America has no money. And they can’t get a mortgage. Well, for present pricing. Housing will “recover” when the average American can afford an average house. So, prices have to drop, and/or incomes rise. Forget about the latter.

    1. NOTaREALmerican

      And don’t forget the increasing amount of Student Loan debt.

      Seems like the only sensible thing to do is allow Student Loan debt to count as part of the down-payment amount of first-time home purchases.

      One of the fundamental principles of modern account practice is that debt that can be rolled-over is counted as an asset, so this principle should be applied to people too.

    2. Jim A.

      Well the interesting thing is that in the last bubble, the most violent price swings were at the lower end of the market. And this was because Wall Street had an insatiable demand for crappy mortgages that could be pooled and tranched into AAA securities because of the persistent “optimistic” rating and therefore mis-pricing of those bonds. And yes, SF and Manhattan are special cases because of geography. I’m not sure why CA is so crazy overpriced in general, though.

    3. Demeter

      I wouldn’t live in San Fran if you paid me a fortune.

      I was stuck in the area for 2 years….couldn’t wait to get out to someplace with trees and sane people and families.

      PS: while I was there it snowed and the pipes froze and broke all over.

  6. NOTaREALmerican

    SF is a nice place. I’m sure many in the Elysium Class have some part-time real-estate in SF. Lots of good restaurants serving holistically-grown grass-fed beef and real free-range chickens with untrimmed beaks cooked over organic charcoal. It takes allot of money to live a proper SF life. People don’t appreciate how much food has improved in the US because of the taste-buds of the Elysium Class. SF has food that rivals Italy now.

    The peasants don’t mind tho. They’ve got high-speed internet and good cell-phone service for the iPhones, and their food has improved too: you can get organic in Safeway now. That’s progress!

    1. MikeNY

      SF *is* a nice place, but this SV tidal wave of money is ruining it. It’s becoming like Manhattan, a playground for rich people. The Castro and Haight are now museums; walk down Valencia St in the Mission and you’ll be run over by double-wide strollers the size of Escalades; Polk St. is down to about 1 draq queen sighting a month; and Filmore and Union St are both morasses of techno-yuppie frat boys in flip-flops and techno-yuppie sorority girls in Under Armour work-out gear. And designer cupcake stores. Dear God.

      Well, there’s still the Loin. And so far, they haven’t ruined the geography.

      1. sleepy

        I was born in Memphis, spent 19 years there and then 29 years in New Orleans. I now live in Iowa, in a small city of 28,000. I don’t particularly like it here and both Memphis and New Orleans were far more interesting culturally and socially and all that good stuff, but living and housing is so cheap in small town Iowa that it’s easy to feel I’ve managed to escape the worst of the bad times. If you have a halfway decent job here you can still manage a traditional middle-class life.

          1. sleepy

            Yep, I’m not up to survival mode in my garden, but I do manage to grow raspberries, strawberries, tomatoes, potatoes, garlic, herbs, and peppers in soil that is incredibly black and rich and needs nothing added, though I do compost mostly for recycling purposes.

            1. Jim in SC

              I think you’d made a good move. I recommend that people look at rural South Carolina for the same reason. The soil is not as good, but it’s warmer, and really really cheap.

      2. Elizabeth

        To Mike in NY:

        You’re absolutely right! SF is no longer the same city I came to 30 years ago. The middle class is being kicked out in favor of the SV techies who neither appreciate the culture that was once SF, nor do they have any appreciation for the rich history of SF. There’s also a new attitude taking over here – rudeness, and an “I got mine” attitude. SF once had a great deal of charm and “heart.” If it weren’t for the natural beauty of the city, it would be just another ugly big city. I’ll be gone in a year or two.

  7. Phil

    @NOTaREALmerican, who wrote: “SF has food that rivals Italy now”

    Only in your wildest dreams. Great food is found EVERYWHERE in Italy; in San Francisco, that isn’t true. San Francisco has great restaurants and even great street food, but San Francisco (and San Franciscans) are pretentious about their great food. Italians have embedded great food into even their most humble cafes. Not so in San Francisco.

    Also, the gentrification of San Francisco has sucked out the very thing that made San Francisco great – i.e. great socioeconomic diversity and distinctive neighborhoods with “personality”; these things are already gone, or fast disappearing.

    There is simply no way for a beginning social worker, K-12 teacher, public safety person (police, fire), construction worker, trades person, retail owner, small business owner, etc. etc. to be able to afford a home in San Francisco; they have been priced out.

    Yes, San Francisco has great physical beauty, but that is really all that’s left. It’s fast becoming a museum city whose true soul has been sold. San Francisco has become a harsh, toxic place to live, as has most of the Bay Area.

    I don’t see prices coming down; there will always be some rich foreign investor or techy willing to pump millions+ into a status address.

    Finally, it makes me cringe to hear San Francisco being compared to REALLY great cities, like NY, Paris, Rome, Moscow, Tokyo, London, Shanghai, etc. Seriously, San Franciscans and their PR toadies need to get a grip. This is a rather provincial place, culturally, with great physical beauty – made all the more uninteresting by the homogenous influence of great wealth, seeking status.

    1. sleepy

      I agree about San Francisco and the food.

      I haven’t visited San Francisco since I lived in New Orleans for many years and was always told how great the SF food was. I didn’t find it true at all, at least any wide availability of that great SF food. Compared to New Orleans where most corner groceries, bars, or sandwich places had excellent take out food at cheap prices, San Francisco was a bust. Maybe I looked in the wrong places, but that was my experience.

  8. xrt

    I recently relocated from SF to LA. After selling my home in SF, I thought I would be getting a much better home for the same price in LA. Then, I started shopping in Manhattan Beach. Teardown with no view on a tiny lot. Ask 1.5M. I put in an offer … one of many. An all cash offer took it for just less than 2M. Just wow. I took a shot at one in Corona Del Mar. 3500sq ft lot. Small old home. Ask was in the 1.8s. I bid 1.95M. No dice. Still waiting for that one to close just to see what it took. Then there is Santa Monica. In that area, the safe side is north of Montana. Teardowns there start closer to 3M, if you can find one. Out of my price range. I am now headed to South Redondo Beach to take a look at a home that is nearly a red tag for 900K. Once again, a tiny lot. I am hearing there are already many offers because of the low price. This is worse than SF. I sold a very nice larger home in Moraga in 1.3M. In LA, if you want a nice home, 1.3M just does not cut it, unless you accept a defective location ( i.e. Airplane path in Newport Beach ), a junk home, or minority neighbors. SF is not as overpriced as the media would like you to believe. Signed fustrated home shopper.

    1. sleepy

      Unless your life circumstances absolutely require you to live in–as you put it–a “defective location” for $1.3 million, why on earth do you choose to live in L.A.?

    2. Fair Economist

      Well, if you insist on living in a beach city, sure you’ll pay a premium. Move back one city to Torrance or Lawndale or Culver City and it’s much less crazy. Prices are indeed high here, too high IMO, but having recently assisted when my mother-in-law was shopping for a condo in the East Bay in the SF area, it’s notably *less* crazy than SF.

      Oh, and “minority neighbors”? How horrifying! You do know CA is a majority-minority state *and* less segregated than the country in general, right?

      1. xrt

        Fair Economist, Lawndale is a near ghetto. And, I can’t recall teardowns on 4000 sq foot lots hitting the 2M mark with multiple offers in SF. You can stlll get a very nice home in the east bay area for the low to mid 1M dollar range. Most of Torrance is garbage, as is much of Culver City.

  9. nothing but the truth

    this is the end result of the krugmanian conceit that “it is not about morality”.

    since it has to be about _something_, that something is forbidden to be morality and is therefore now about money.

    So money becomes the end, purpose and moral of life. You can’t complain because it is about money and you dont seem to have it. “They” of the gilded circles do, who are talked about and are therefore the only ones alive because only they matter in the sense their pain matters, yours doesnt because money.

    this is beyond absurd, this is sad. we are now slaves to precisely something that is nothing. the end result of paper money. the rich get richer because only money can make more money.

  10. kimsarah

    Thank you for posting this article. Think of the housing bargains to be had by the mega-rich when the entire housing bubble bursts.
    I wonder how the middle and lower-end houses are selling and who is buying them — aside from the top-end properties that continue to be snapped up.

  11. Aaron Layman

    Yep, the new normal. Housing bubble 2.0 where real estate has detached from the real economy and now functions as it’s own currency…until the currency gets a major haircut of course!

    I can only imagine that Shitibank, JPMoarAgain and the cronies in Congress will be oh so “surprised” when this one pops too.

    God help us

  12. TedWa

    I’m going to call the new bust in 2016 and my guess is that it will occur just as it did during Bush’s last months in office and during the regime change (that was really no change at all). There’s too many signs pointing to this being 2006 all over again, including home prices reaching those levels again. But that is just a WAG, so no one should get upset. Regime change has worked so well in the past for the banksters. Including new legislation to bail out the banks. Now why would that need to be done? Strange times

  13. BayAreaNative

    The US has been far behind in the bifurcation of real estate that has occurred in much of the developed world. Nice parts of London, Paris, Hong Kong, Singapore, etc homes easily cost 3-4x what an equivalent home costs here. Foreigners have figured it out, belatedly. So place like Palo Alto, anything along the nice coastal area of LA, etc will eventually catch up with global pricing. As for the so-called charm that SF had in the 80s and 90s, if drug addicts and homeless is your thing, perhaps. If not, the gentrification of places like the Mission is a welcome development, and honestly, still in its early phases. You can still smell piss as you walk in the streets.

  14. nohomehere

    And investors, fattened by Yellen’s monetary policy?So Fed Chair Yellen, in her press conference after the FOMC meeting today, said she’s surprised that housing hasn’t recovered more than it has. But for those who were on the receiving end of the Fed’s free money, the housing market recovered just fine

    “This is why the Fed is so obsessed with creating inflation: because it renders these gargantuan debt loads more serviceable. In simplest terms, the Fed must “inflate or die.” It will willingly sacrifice the economy, and Americans’ quality of life in order to stop the bond bubble from popping”.

    from another article AT Phonix ! Question to Yves. Who are the home (real estate) buyers , are they investors from wall street banks or fronts for them who get these deflation fighting dollars ? OR , is it a combo of foreign capitol avoiding US bonds in search for return ? could you define who they exactly are ? also do you think that now that the banks are off the hook for losses in speculation , that they will start buying commodities in mass quantites to reflate the prices? or is this the last hurrah?

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