Inside San Francisco Real Estate

An article on CNN Money the other day got us thinking about the overall health of the San Francisco real estate market.  Sure, prices are down.  No market has been immune to the country’s economic downturn.  But some have been hit with a cold while others are bedridden with pneumonia.

Time for a check up

The article mentioned above talks about the Miami real estate market.  Some tidbits:

• There are 13,200 homes for sale in Miami right now.
• There are 21,600 condos for sale in Miami right now.

We’re not alarmed by these numbers… after all, Miami is a very different market than San Francisco and comparing the two is not exactly “apples to apples”.  However, there is a way we can normalize data between the two markets to control for the differences.  We can accomplish this by looking at MSI, or months supply of inventory.  We’ve written about this metric before.  Basically, months supply of inventory is a measure of how many months it would take to sell off all of today’s inventory (active listings) if new listings ceased coming on the market immediately.  It is calculated by taking the total active listings in a market and dividing it by the number of homes under contract.  For example, lets say there are 10 condos for sale in a market and 5 have gone into contract during the current month.  This market has just 2 months supply of inventory, which is pretty hot.

Markets that have 0-3 months supply of inventory are considered hot.  3-6 months is in balance, 6-9 months is cool, and 9 or more months is cold.

When we compare Miami to San Francisco, here’s what we currently see:

• Miami currently has a 52-month glut, I, I mean, supply of condos.  That means it would take over 4 years for all of today’s active condo listings to sell if new units stopped coming on the market immediately.  Add to that shadow inventory, foreclosures (which are a huge problem there) and pocket listings and… Holy toledo!!  Ok, now we’re alarmed.
• San Francisco, according to the highly respected real estate analysis company Terradatum, has 4.7 months of condo inventory.  We’ve also made similar calculations in previous posts.  Add to that shadow inventory, foreclosures (which really aren’t a problem here) and pocket listings (which aren’t many) and we’re doing quite well from an inventory standpoint.
• The national average?  We’re glad you asked.  The National Association of Realtors says that the current months supply of condo inventory is 8.7 around the nation.  Add to that shadow inventory, blah blah blah, you get the picture.  This means SF’s condo market is about twice as healthy as the national condo market.

Miami has never been colder.

How about single family home inventory?

• Miami currently has a 31 month supply of single family home inventory.
• San Francisco currently has 3.8 months supply of single family home inventory.  We are about 10 times healthier than the Miami market in this case.
• The national average currently sits at 5.8 months.

So what happened in Miami?  And what is happening in San Francisco?

First and foremost, Miami was one of the hottest markets in the early 2000′s.  It exploded on the scene quickly, loans were given to anyone with a pulse, and speculators got greedy.  Florida’s tax code had people flocking to take advantage.  Miami was supposed to enjoy big population growth in the form of retired baby boomers, flocking down to enjoy year-round golf and a low cost of living.  But a real estate run-up shut that spigot off pretty quickly, as many would-be relocaters were priced out of the market. Developers responded to the initial surge and eventually wayyy outpaced demand.  Run-away development left a disaster in its wake — a disaster we currently see as years of supply out there, some even arguing that there could be a decade’s worth.  Diagnosis?  Full blown pneumonia.  Prognosis?  Give it ten years and we’ll see.  We’re not sure what kind of sponge it would take to soak up all that inventory.

Is it possible that with prices so low the spigot could turn back on?  Maybe.  But in that scenario we have a chicken or egg battle.  Lenders are reluctant to make loans in high risk markets and high risk buildings… many of which have that stigma in Miami.  With the number of foreclosures and delinquent HOA payments, condo loans in the city are no gimme.

So much for the "if you build it, they will come" theory.

San Francisco saw a much different fate.  A group of staunchly conservative (with regard to development, that is) city planners disallowed mass development — the kind that we saw take place in Miami.  They were and are still criticized, but we feel they made the right judgment calls– at least as far as property values go.  Costs to construct and jumping through countless bureaucratic hoops made it tough for any developers to want to do business here.  Add to that a piece of land the size of a postage stamp that is surrounded by water on three sides, and we’ve weathered the storm rather well.

Diagnosis?  Cold.  Prognosis?  Vital signs are good and we’ll be back on our feet in no time– at least in relation to markets that don’t have the same political and geographical forces at play.  As long as inventory levels stay tight in SF, and as long as people see it as a desirable city to live, we should be much better off than many other markets around the nation… both now and in the long run.

And that’s one thing we’re constantly monitoring and reporting on at InsideSFRealEstate…  inventory levels.  If you own or are thinking about owning real estate, be sure to keep tabs yourself — whether its from us or another source.

So back to the original question – what can we learn from Miami?  Actually, there are 2 things.  1)  An important lesson in inventory levels as it pertains to real estate, and 2) how to party until 9 in the morning.  Cheers.

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Update: Wow, we were just talking about this!

Vacancies Threaten Miami Housing Market
Vacancies plague the Miami condo market.

Source: The Miami Herald, Monica Hatcher (04/21/2009)