Back in the still-uncertain days of September 09, every market pundit had his or her own letter for what shape the recovery would take. I blogged about Ben Bernanke’s “U,” Liz Ann Sonders‘ “V,” and Nouriel Roubini’s “W” here. Though one could argue the jury is still out, I think it’s fair to say that Liz Ann won round one.  The recovery is looking and feeling like a “V”  — and in fact is falling pretty much within historical patterns. (Full disclosure — I had my money on Nouriel.)

I recently spent 20 minutes listening to her most recent webcast, and it all sounds pretty seensible.  What I like about Sonders in particular is that she’s basically a contrarian. So many people are betting against the stock market’s phenomenal rise right now — and in favor of bonds — that she thinks that the bears are refusing to accept the fact that a solid recovery is in place.  I like the way she puts it in a related article:

Skeptics are often the loudest folks in the room, and the bear case is often the more “intellectual” case, but the market has a tendency to reward the minority view, not the majority view.

What’s all this got to do with San Francisco residential real estate?  One of her points touches on a theme that I’ve sounded here recently. As everyone knows, interest rates are likely to rise as the economy starts to strengthen and the Fed starts turning off the easy credit spigot.   Sonders is not predicting the stratospheric rates that occurred in the early 1980’s.  Nevertheless, it doesn’t take much of an increase in rates to have a significant impact 0n the amount of house you can buy.

Say you’re thinking about borrowing $700,000 on a 30 year fixed rate loan at the current rate of 5.25%.  Your payment would be just under $3,900 a month.  Now say that interest rates increase by just half a percent to 5.75%.  Your monthly payment would increase to just under $4,100 a month.  Maybe a difference of $200 a month doesn’t sound like that much:  a couple of fancy restaurant dinners would would cost the same.

But look at it this way.  Say that the the maximum you’ve decided — or the bank’s decided — you can afford to pay each month on your mortgage is $3,900 a month.  Now that half percent increase in rates means that the maximum loan you can qualify for is around $662,000.  That’s a loss of $38,000 in the amount you can borrow and the amount of house you can buy.

It’s also a heck of a lot of fancy dinners.

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• Investors Should Give the Recovery Some Respect — but Watch for Rising Rates (dailyfinance.com)

Since for most of us our homes represent our biggest asset, that’s pretty good news when you consider how bleak things looked back in March of 2009.  Just think of how you were feeling about your 401(k)s.

But before you break out the champagne, consider that national home prices have now “recovered” to levels last seen in Autumn 2003.  That’s over six years of appreciation wiped out.

The San Francisco Metropolitan Statistical Area (that’s 5 of the 9 Bay Area Counties, folks) is up 15.2% from its trough value. Case-Shiller does not break out San Francisco proper from the much larger MSA.  However, I calculate that median prices in January were up just 10% from the lows reached in March 2009.  (I use 3 month moving averages, which approximates the seasonal adjustments the CS Index uses.)  To see how SF did through 2009, check out my blog and charts here.

It’s hard to remember just how close to the brink of catastrophe we seemed to be just a year ago.  Major financial institutions – failed.  Credit – impossible to get. Sales—anemic.

With the benefit of hindsight, not to mention survival, some are now criticizing Paulsen, Bernanke, et al., for their haste in rescuing the financial system, but I, for one, will reserve my scorn for the appalling judgment of the likes of Morgan and Goldman and their obscene bonuses.

How did the San Francisco market do?  Here’s where we are for single-family homes (click to enlarge).

We ended the year still down 18% from our all-time high of June of 2007.  That puts us at around the price levels of the spring of 2005.  Not great, but during those scary first months of the year when there was no bottom in sight, we were down to price levels not seen since early 2004.

It’s also interesting to see how Days on Market (DOM) inversely correlates with price, at least over longer periods.  In addition to the very regular seasonal dips in price every December/January, it’s easy to see that as DOM lengthens over time, prices decline.  While DOM remained less than 40 days, prices stayed high.  The correlation isn’t perfect – and certainly not on month-to-month time-scales — but it looks pretty good to me.

So for the “half-empty” crowd, the bottom line is that we’re still down 18% from our all-time highs.   The story looks much more positive, however, if you look at 2009 in isolation.

Now a 23% gain for the year ought to be making people feel pretty good.  Note that median prices have been in the $700,000 to $800,000 bandwidth for the last three quarters.  The dip in the waning months of the year can be attributed to seasonal factors.

I can already hear the nay-sayers arguing that looking at year end numbers is arbitrary  or, worse, distorts the picture.  (These are the same people who don’t believe in celebrating their birthdays!).

I’m certainly not arguing that happy times are here again.  But , if nothing else, that 23% increase confirms just what a wild ride the last two years have been.

As for 2010, I confess I’m beginning to feel a bit more optimistic than I was a few months ago.  Manufacturing seems to be continuing to expand.  There are some signs of job growth.  Still, Europe is now looking shaky and, closer to home, one should never discount the ability of our politicians to screw up the recovery.

All things considered, though, I’ll take my glass half-full please.

Another glorious winter’s day in San Francisco.  My family and I biked over the GG Bridge to Sausalito and then took the ferry back to Fisherman’s Wharf. Thirty-five years in this town and I’ve only done that ride twice.   The previous time was a week ago, to celebrate my 10 year old son’s new birthday bike.

2009 was not a kind year.  I feel very grateful that my family has come through in reasonable shape.  It makes it easy to appreciate the fine views and the fine weather.

Exactly a year ago, I officially launched this blog. It’s been enormously gratifying writing it.  First, it’s made me feel plugged into the market in ways both large and small.  Secondly, because I’m a visual kinda guy, those charts that I’ve tried to make a central part of  this blog have helped me understand and retain what’s going on in ways that columns of numbers just don’t.   Plus, I’ve learned a heck of a lot more about Excel — and, alas, its limitations as a database –  than I ever knew before.)

And finally, it’s been great to feel appreciated!   Though I sometimes joke that I have a readership of 7½, it is a loyal, thoughtful and appreciative one.  Well, that’s three of you anyway.

Happy New Year everyone!  My best wishes to each of you, and thank you for your support.

Ken Rosen, Chair of the Fisher School For Urban Economics over at UC Berkeley, has good news for San Francisco home owners.  “The recent rise in home prices and sales activity lead us to believe that the worst part of the correction in home prices is behind us and that housing market conditions are showing signs of improvement.”

This report, based on June results, is the first of what will be a monthly analysis of the San Francisco real estate market undertaken by The  Rosen Consulting Group on behalf of The San Francisco Association of Realtors.  You can download it here.

I’m a big fan of Rosen.   I listen to him speak once or twice a year at a real estate symposium put on by the Fisher School; he and others bring a level of sophistication and breadth of view to the analysis of the real estate market that is hard to find when we are toiling in our own back yards.  I blogged on his predictions about the market  in a couple of posts entitled The View From Space at the end of last year.  Does that mean you won’t be needing me to crunch the numbers any more, gentle reader?  Not necessarily:  I believe the report miscalculated the median year-over-year price change for single family homes from June 08 to 09.  Rosen says it’s 6.8% down.  SFAR’s own numbers put it at 4.9%.  (I have us down 5.7%:  some discrepancies, alas, are inevitable — a result of delays in agents and brokers putting “sold” information into the MLS system from which all this data is derived.)  Anyway, I’ve notified SFAR — we’ll see what happens.  Besides, I’ll continue to try to get as fine-grained as I can in my analyses.  Rosen is a big picture guy.

Quibbles notwithstanding, Rosen makes some interesting points and one of them has caused me to rethink a previous post of mine.

His report points out that nearly a quarter of active and closed sales in June were in District 10, which encompasses “distressed” areas like the Bayview and Hunters Point.  Back in May, I argued against the commonly-heard thesis that District 10, along with District 3, were dragging down values in the city as a whole.  My chart showed that the City taken as a whole was about as far off its all-time high as Districts 3 and 10 were off of theirs.  Well, I was right.  And wrong.

It turns out that both statements are true:  Districts 3 and 10 were doing no worse than the city as a whole in terms of where they were relative to their all-time highs.  But it’s also true that the high volume of low-priced sales in those districts, combined with many fewer sales at the top end of the market, did pull down the median value for the City as a whole.   How did I miss it?  I didn’t look at the distribution of sales across the various districts. Rather, I compared the medians for each data set without looking at relative sales volumes.

Data analysis is tricky stuff.  It’s easy to pick and choose your metrics to match your agenda.  But it’s just as easy to miss a detail that changes the picture considerably.

Here are some more tidbits from the report:

• Despite the concentration of low-price sales in Districts 10, there has been a significant jump in sales volume in high priced Districts 5 and 7, which encompass neighborhoods like Noe Valley and the Marina.
• The large number of condos on the market from new down-town and SOMA high rise projects is continuing to put downward pressure on condo values.
• Rosen expects home prices to be soft but to continue to improve through the remainder of the year.  “With for-sale inventory still at elevated levels and expectations for a continued rise in the unemployment rate through the end of this year, buyers will still have good purchasing opportunities.”

I got that part right.

I looked at percentage change from all time highs for condos and single family homes (sfd’s) since January 2003 and here are the results for the city as a whole.

Until June 2008, condo and home prices were in lock-step in terms of price appreciation and decline.   Thereafter, homes fell first and further. (Do I hear a lithp?) In March 2009, the delta between condos and home prices was a whopping 13%.  Since then, however, home prices have recovered smartly:  as of June, homes are about 4.5% further off their all-time highs than condos.

What does this all mean?  First of all, I wouldn’t take too much consolation just yet in the upward spike in both condo and home prices since the beginning of the year.  If you take a look at the chart, this happens every Jan/Feb when people start buying out of the winter doldrums.  I wouldn’t predict a bottom until we see what happens this winter.

Secondly, given the woeful condition of the economy and the credit markets, together with the fact that San Francisco is not a badly overbuilt housing market, it sort of makes sense that condos are holding their value relatively well as people are finding themselves priced out of more expensive single family homes.

Still, the current delta of only $100,000 between median condo and median home prices seems rather small.  If people are just begging to know what the historical average is, let me know and I’ll find out.

That prompted some discussion about whether the results would be different if you excluded home sales in some of San Francisco’s outlying areas, such as the Bayview and the Westlake districts. These and other neighborhoods are included in MLS (Multiple Listing Service) Districts 3 and 10. Here’s the official MLS district map.

The thinking, mine included, was that San Francisco’s generally more expensive “core” areas would have held up better than the more modestly priced outer areas, where the economic downturn could be expected to have had a greater and more immediate impact.  Did they? I recently posted this chart at The Front Steps as a partial answer.

What’s really interesting about this chart is how closely the “Core Areas” and “All Districts” price lines track each other. This isn’t altogether surprising since the “Core Areas” data overlaps with over 75% of the “All Districts” data.   The fact that “Core Area” prices are higher also isn’t surprising.

But have “Core Areas” been holding up better than the city as a whole?  Based on this chart, I thought the answer was “yes”, since it shows an increasing price divergence in favor of “Core Areas” starting around July 2007.

Still, the divergence was relatively subtle, so I decided to take another stab at answering the question. This time, I focused directly on Districts 3 and 10 and compared the results to the city as a whole. I also looked specifically at how far prices had fallen from their respective all-time highs. Here’s the resulting chart — note, this is single family homes only, not condos (click to enlarge) .

In both cases, all-time highs were reached in June 2007. What this chart clearly confirms is that prices in Districts 3 and 10 really did fall further and faster than prices for the city as a whole. Initially, that is. Starting around July 2008, prices dropped off a cliff city-wide. As of February 2009, Districts 3 and 10 are actually doing slightly better than the city as a whole.

I will spare you the details of my travails with Excel, pivot tables, and generating median values for large data sets. Not fun – and the principal reason why I haven’t posted for a few weeks. However, I do think that this chart allows us to conclude that “Core Areas” haven’t performed substantially better or differently than the city as a whole. Much ado about nothing you say? Perhaps, but at least we’ve now established a baseline — sort of like the S&P 500 — against which to compare specific neighborhoods and areas.  Stay tuned.

I tracked average and median prices going back to 2000 for the ten combined MLS districts that comprise the San Francisco Multiple Listing Service — the big database that realtors use to list properties and record sales information .  (The MLS District Map is here, on my Market Trends page.)  Here are the results (click to make the chart bigger):

Pretty scary stuff, especially when you look at the suislide (a new word is born?) that started in June of last year and shows no signs of slowing down.

Before you head for the windows, or call your realtor (me!) to start looking for a house to buy, consider this:  as I’ve said before, there’s nothing so local as real estate.  It really does matter what neighborhood you’re talking about. This chart, while it does illustrate something meaningful about the overall SF market, doesn’t tell you anything about values in any particular neighborhood.  It lumps together data from neighborhoods as diverse as Hunter’s Point and Visitacion Valley in District 10, which has been slammed  for well over a year now, with neighborhoods like Noe Valley  in District 5 and St. Francis Wood  in District 4, both of which seem to be holding up pretty well.  Go to my Market Trends page to see the charts for individual districts.  I’ll be creating charts for individual neighborhoods within districts for future blogs.

And if it’s any consolation, SF real estate is holding up a heck of a lot better than the stock market, don’t-cha-know.  Today the S&P 500 closed at 682.55.  The last time it closed under 683 was on May 17, 1996.

In essence, DOM tracks the average number of days that properties have been on the market from the time they became active on the MLS (Multiple Listing Service used by realtors) to the time they actually sell.

Great minds must think alike because it turns out that my friends over at Inside SF Real Estate have been exploring the same thing.  Head over to their recent post for a look at DOM trends over 14 years.  What they haven’t done, however, is track DOM against median prices.  Ha!  I have, and here are the results for the last three years tracked by month (my numbers are pulled directly from the MLS database  — click to make the chart larger).

Now that’s what I call correlation! Note that the right-hand Y axis tracks DOM inversely, with longer periods at the bottom and shorter periods at the top.  So, this chart is basically showing that during periods, even relatively short periods, when the average DOM falls, prices rise, and when properties stay “on the market” for longer, prices fall.  This is just what you’d expect.

Why?  My guess is that DOM captures many of the factors in play in the real estate market at any given time.  For example, if credit is tight and appraisals are rigorous, you’d expect that transactions would take longer to get approved.  Likewise, if lots of people are bidding on the same house, you’d expect that the winning bidder would promise a quick “no contingency” close and that there would be no haggling on the sale price.  When the market slows, you’d expect more cautious buyers, more haggling on price, longer closing periods — all reflected ultimately in the DOM.

As my friends over at InsideSFRealestate pointed out in their post on DOM, realtors can play games with DOM.  For example, if a property doesn’t sell, they’ll take it off the market, and then put it back on as a “new listing” at a lower price and voila, the DOM resets to zero.  Still, that would just tend to increase the “down” side of the line — the correlation would still hold.

The only other point I’d add is to note the seasonal trend in the chart.  It seems that every December/January, DOM increases and prices dip.  Perhaps that’s the best time to buy.

One can quibble about whether a 30 day lag on listings to sales is sufficient, but the average days on market for 2006, 2007, and 2008 were 29, 41, and 51 respectively.

Here’s the revised chart.  The median price line and the Absorption Rates line up beautifully, don’t they?  Until you remember that there’s supposed to be an inverse correlation between them.  True, there appears to be an inverse correlation over the last few months of 2008, but that could simply be due to the lack of forward data.  It certainly doesn’t negate the lack of correlation over the previous nearly 3-year period.

Stay tuned for a chart showing median price plotted against Days on Market