San Francisco – July 2021

Welcome to our July newsletter, where we’ll explore residential real estate trends in San Francisco and across the nation. This month, we examine how buyer demand might shift during the rest of the year, taking into account the historically low inventory, record high prices, and the Federal Reserve Bank’s incentives to keep interest rates low despite rising inflation.

We’ve entered into an economic situation that is uncommon, at least in recent history, with rising inflation and high unemployment. The Federal Reserve Bank (the Fed) has two goals known as the dual mandate: price stability (inflation) and maximum sustainable employment. The pandemic, of course, threw a sizable wrench in the economic machine, causing mass unemployment from which we are still recovering. Easy monetary policy brought more money into circulation and a drop in interest rates.

The low-rate environment spurred homebuying across the country, lowering available inventory and driving home prices to record highs. Most potential buyers are flush with cash and have high credit scores, which has created an incredibly competitive environment. How will the massive price increases we’ve seen over the last year affect demand? And how will the market respond to a price correction?

As we navigate this period of high buyer demand and low supply, we remain committed to providing you with the most current market information so that you feel supported and informed in your buying and selling decisions. In this month’s newsletter, we cover the following:

• Key Topics and Trends in July: The Fed will continue to keep rates low through 2021, which will continue driving the demand for homes. Despite high demand, low inventory and climbing home prices will price some potential buyers out of the market. 
• July Housing Market Updates for San Francisco: The median single-family home price reached an all-time high—over $2 million—displaying the desirability and affluence of San Francisco. Condo inventory fell substantially as demand for condos has continued to rise. 

The past year saw the highest sales volume and fastest price increases on record nationally. We want to take a closer look at this massive buyer demand, and the ways in which it’s affecting the housing market. 

At the start of the pandemic, the housing market looked incredibly unstable: buyers and sellers were pulling out of deals, sales volume and inventory dropped, and unemployment skyrocketed. The uncertainty around the housing market was short-lived, however, and it became clear that homes were going to have a remarkable year.

The Fed’s easy monetary policy over the last year has caused a swift rise in inflation, about 5%. After a decade of relatively low inflation, often under 2% annually, consumers are noticing the price jumps. In fact, there was slightly more inflation during the year from May 2020 to May 2021 than there was during the three-year period from 2017 to 2020. The price increases are partly due to monetary policy and partly due to global supply chain disruptions caused by the pandemic. As the pandemic fades on a more global basis and supply chains stabilize, prices should correct, at least to an extent. For the moment, the Fed has decided to keep interest rates low and continue infusing money into the economy.

Even though inflation has become more noticeable, the Fed still must consider the employment rate. As you can see from the chart below, employment hasn’t reached pre-pandemic levels, and the growth rate has slowed. Because employment typically grows at such a constant rate, we still have around 10.5 million fewer employed people than if there had never been a pandemic. 

 

The Case-Shiller 20-City Home Price Index, which measures the aggregate home prices in the 20 largest metro areas, rose 15% year-over-year in April 2021, marking one of the sharpest increases in history. The Fed also has incentives to prevent the housing market from crashing. A sharp drop in home prices would wipe out significant wealth and put many new homeowners underwater. These are huge disincentives to change the current path. 

As shown in the chart below, we’re currently hovering at historically low mortgage rates, which will likely remain for the rest of the year. As mentioned earlier, low rates incentivize buying, as does inflation. When consumers know the dollar’s purchasing power is diminishing more quickly, then buying a home sooner rather than later makes more sense. 

 

In 2020, incentives to purchase a home have translated to the most homes sold in a year since 2006. Although we’re only halfway through 2021, it’s safe to say that home sales will outpace those in 2020.

 

As we look at the last 12 months of annualized home sales in the chart below, we see sales slowing. This is largely caused by the lack of inventory. There are simply not enough homes to meet the current demand. Even if some potential buyers get priced out, the housing market will not see much of a change.

 

The environment, therefore, is right for demand to outpace supply in 2021. We’ve reached near-perfect conditions for qualified buyers—high credit scores, large down payments, and low-rate financing—so we anticipate a competitive landscape for buyers throughout the year. 

While the market remains competitive for buyers, conditions are making it an exceptional time for homeowners to sell. Low inventory means sellers will receive multiple offers with fewer concessions. Because sellers are often selling one home and buying another, it’s essential that sellers work with the right agent to ensure the transition goes smoothly.

During June 2021, in San Francisco, the median single-family home price rose to another all-time high, breaking through the $2 million mark for the first time in history. Condo prices edged higher, but are slightly below peak. Year-over-year, single-family home prices increased meaningfully, up 17%, while condo prices rose 8%.

 

In 2020, single-family home inventory increased to its highest level since 2011. From May to September 2020 (five months), inventory exploded. But we need to look at it through the lens of a city in a constant state of single-family home undersupply. Despite such a meteoric rise, inventory fell even faster than it rose, which speaks to the desirability of San Francisco. By January 2021, inventory declined to lower levels than in January 2020, then ticked up slightly in February and March before going lower still in April, May, and June 2021. As you can see from the chart, sales outpaced new listings in May and June, lowering inventory below pre-pandemic levels. Higher and higher prices have done nothing to curb demand. June had the second-highest number of sales in a month over the last 24 months. With such a consistently high level of demand and fewer homes for sale, prices will likely continue to appreciate throughout 2021.

 

The number of condos on the market fell in June to a lower level than last year’s. Demand for condos has come back strong, and sales outpaced new listings in May and June. Sales in June 2021 significantly outpaced sales in both June 2020 and June 2019. Condo inventory is trending toward pre-pandemic levels.

 

Both single-family homes and condos spent slightly less time on the market in June 2021 than they did in June of last year. As we’ll see, the pace of sales has contributed to the low Months of Supply Inventory (MSI) over the past several months.

 

We can use MSI as a metric to judge whether the market favors buyers or sellers. The average MSI is three months in California (far lower than the national average of six months), which indicates a balanced market. An MSI lower than three means that there are more buyers than sellers on the market (meaning it’s a sellers’ market), while a higher MSI means there are more sellers than buyers (meaning it’s a buyers’ market). In June 2021, the MSI remained below two months of supply for single-family homes and condos, indicating that the market favors sellers.

 

In summary, the high demand and low supply present in San Francisco have driven home prices up. Inventory will likely remain low this year with the sustained high demand in the area. Overall, the housing market has shown its value through the pandemic and remains one of the most valuable asset classes. The data show that housing has remained consistently strong throughout this period. 

We expect that the number of new listings will increase in the summer months. The current market conditions, however, can withstand a high number of new listings coming to market, and more sellers may also enter the market to capitalize on the high buyer demand. As we navigate the summer season, we expect the high demand to continue, and new houses on the market to be sold quickly.

As always, we remain committed to helping our clients achieve their current and future real estate goals. Our team of experienced professionals are happy to discuss the information we have shared in this newsletter. We welcome you to contact us with any questions about the current market or to request an evaluation of your home or condo.