San Francisco’s Luxury Condo Bubble Turns into Condo Glut

A few days ago, I shared some observations about the San Francisco housing market, as seen from a walk though residential areas. I walk everywhere and see realtor signs here and there. But that day, I saw 14 realtor signs, advertising 15 units for sale – by far the most I’d seen since the Financial Crisis.

“San Francisco is on sale,” I wrote. At the worst time of the year – November, December, January. I advised caution using this observation. It needed to be confirmed by data, I wrote; but if confirmed, San Francisco’s crazy Housing Bubble 2 is going to have a problem.

Now confirmation is piling up. In late October, national real estate broker Redfin had already reported that the median home price in San Francisco in September had jumped 14.9% from last year, as home sales in units had plunged 25.3%!

This is year-over-year data. Seasonality has nothing to do with it.

On Redfin’s list of 65 markets around the US, there were only three other markets where home sales declined year-over-year: Indianapolis -4.1%, Omaha -0.8%, and Tulsa -5%. The national average gained 9.0%. So San Francisco’s 25.3% plunge is in a category of its own. That was for September.

Now we have some data for October from Paragon Real Estate in San Francisco:

The median home price had peaked in May at $1,225,000, based on MLS data. That was 65% higher than at the insane prior bubble peak that then imploded spectacularly, and 104% higher than in January 2012. Following normal seasonal patterns, it fell 8.4% to $1,150,000 by September then rose in October to $1,200,000 (with the median house price at $1,300,000 and the median condo price $1,100,000). Based merely on seasonality, prices are expected to hit a low point in January.

But the bottom is already falling out of the “luxury market.” This segment is defined as the top 20% of reported sales (currently, houses over $2 million and condos over $1.5 million). As sales volume sagged “well below levels hit in the previous 2 years,” the number of listings soared in September and October to a new all-time high. A very toxic mix.

This chart shows the ascent of luxury listings as reported to MLS by November 5. Note how the listings of condos (green line) shot completely out of whack:


This luxury-condo glut isn’t going to disappear anytime soon, thanks to the construction boom in San Francisco. Medium-rises and high-rises have been popping up in certain areas like mushrooms after a rain. Some of these units were or will be completed this year. Many more will be completed over the next few years. This took years to plan, get approved, and funded. And no one knows how to turn off the spigot. These units will simply keep flooding the market. And much of it is at the high end.

Why? Because that’s where the money is. Or was.

Given the onslaught of listings and the flagging sales, Months’ Supply of Inventory soared. A low MSI is characteristic of a hot market. But a rising MSI depicts a market where selling pressure is building, and buyers are suddenly scarce.

For condos of over $1.5 million, MSI jumped to 4.4 months, which Paragon classifies as a “strong buyers’ market,” up from 2.4 months in October 2014, and 2.5 months in October 2013. And up from a record low 1.7 months during the white-hot spring – a brutal switch.

A similar trend is affecting houses: MSI for houses above $2 million has jumped to 3.4 months, a “buyer’s market,” up from 1.6 months this spring, up from 2.4 months in October 2014 and 1.7 months in October 2013. Yet very few houses are built in San Francisco, and practically no new supply is hitting the market. So something big is changing beyond the luxury-condo glut.

At the lower end for condos (up to $1.5 million) there is still less than 2 months’ supply of inventory, so barely within a “seller’s market.” And at the lower range for houses, (up to $2 million), there is less than 1.5 months’ supply, so a “strong seller’s market.”

Paragon wonders, cautiously, if the swoon in luxury housing “is just a transitory market blip,” as it said, “or the beginning of a longer term reality.”

But timing is particularly bad:

Even more so than the general market, the luxury segment is dramatically affected by seasonality and typically goes into deep hibernation from Thanksgiving to mid-January. Having so many active listings on the market just prior to the winter holiday doldrums is one of the reasons why we designate the luxury-home segment as currently having moved into “buyer’s market” territory.

In trying to identify why the bottom is falling out of the luxury segment, Paragon offers three possible explanations:

First, the “volatility” in the stock market, which impacts the affluent more than other groups. They might be trying to sell “before things might possibly get worse,” while others, for the same reasons, postpone buying a home.

Second, listing agents might have “finally pushed the envelope on prices a little too far,” sending buyers to areas outside San Francisco, where prices have been soaring too.

And third, the flood of new luxury condos coming on the market.

So it seems, San Francisco, the city of legendary booms and busts, one of the craziest housing markets in the US, crazier than it had been any time before, with money sloshing through the streets knee-deep, is on the verge of something big.

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  21 comments for “San Francisco’s Luxury Condo Bubble Turns into Condo Glut

  1. Sabbie says:

    Another possible explanation is China’s recent crackdown on capital flight.

  2. Mel says:

    Volatility is a bitch, isn’t it. Especially where long-term planning is involved. So will luxury become the new commonplace, or will they have to destroy the condos to support the prices?

  3. Petunia says:

    Looks like the Chinese crackdown on their casinos has finally affected the real estate markets. If that is the case, then all the markets where the Chinese money was going will show the same slowdown. I read that London was getting soft as well.

    I expect some of the slack in SF will be offset by all the govt spending sure to come from a federal budget with no debt limit.

  4. Mark says:

    The Chinese crack down on capital flight will have a very limited effect. Moving money off the mainland is a big business. They’re only getting better and more efficient at it.

    I’m not in San Fran at the moment but I’m in the midst of a massive real estate bubble myself here in Toronto. I have friends in Berkley and Cupertino who are getting the jitters though. They’re in Biotech and calculated it was cheaper to buy. Unlike here in Toronto where to Own to Rent ratio is the highest it’s ever been along with Price to Income

    Some offshore money, especially in the luxury market, definitely provided extra hot air to the very overvalued Toronto market. A rotten 70’s era bungalow will fetch over 1 Million CAD in bidding wars.

    People have been trying to call the top of the market here for quite a few years now. Trying to time that sort of thing is pointless however. I was around for quite a few real estate corrections and crashes in my time. Regardless, there are boat loads of real estate bubble examples and hundreds of books on the subject.

    It’s quite simple actually. Sustainability is the key. Reversion to the mean will occur if prices are not line real income and economic growth. The Chinese can pour as much money into real estate as they want, but it can’t be sustained indefinitely.

    One day listings will rise and sales will decline. While the residents are scratching their heads the offshore investors will be running for the exits. The catalyst that gives rise to that scenario could be a number of things. A death blow to all those biotech start ups, a decline in investment in favor of other industries, recession, the condo glut Wolf mentioned etc etc… It’s all irrelevant because it will only be known after the fact. And the crazier the prices get the more severe the correction will be.

  5. Mark says:

    In the Bay Area a shack goes for > $1M not exactly what I would consider luxury. When the market softens over the rest of the country we will know the market has truly turned the corner. More anecdotal information, farm land in the Midwest is starting to fall. After years of increasing prices they started falling this summer. The locals say prices were being elevated by foreign investors that have started to disappear.

  6. Sgt Milstar says:

    Another victim of Obamacare.

    • Mark says:

      Oh if it were that simple. Just blame it on the fact that millions more have for the first time health care that does not mean sitting in a hospital emergency room.
      That’s the problem with all you Obama haters – I don’t really like him myself – blame all your economic problems on the ACA and call it a day. #%$@^& brilliant.

  7. AC says:

    So, as stated earlier, no more Chinese buyers – combined with prices that nobody working in San Francisco can possibly afford – equals slow-motion implosion.

    The normal people there have been reduced to this:

    No water service, no sewer service, looks like no electrical service. Land of Opportunity!

  8. Shawn says:

    Awesome research and observations. Would love to see the all those techy yuppies in condo mushrooming SOMA (South of Market) get burned. A lot of that construction is being driven by construction contracts through ‘pay to play’ Mayor Lee’s office.

  9. Andrew says:

    Anecdotally the Chinese buyer seems to be more sparse here in Melbourne, Australia as well. They’ve propelled property to giddy heights, who’s left holding the can?

  10. Michael Francis says:

    I’m wondering if San Francisco has similar problems as Australia and Canada with high rise appartments being built out of cheap, substandard building materials from China.

    It’s becoming a major issue with entire appartment blocks being condemned as a safety hazard with cash strapped owners of those appartments being ordered to pay tens of thousands of dollars to fund repairs which they can’t afford.
    Not only that, they can’t sell their investments because nobody wants to buy them and banks won’t accept them as collaterol.
    No wonder prices are falling.

    • Wolf Richter says:

      The US had a problem with sheet rock from China – but that was to my knowledge largely limited to single-family homes in the South.

      But gosh, if that kind of problem crops up in high-rises….

  11. Mark C. says:

    Most contemporary condos are punched out of beer cans anyway-so we will see slum city in 10 years

  12. lg says:

    Last time I checked single family home construction was down 60% since 2009. 60%! I’ll let you figure the rest.

  13. rde says:

    Want to live in an modern, dynamic city with a far nicer climate than San Francisco? In Medellin Colombia you’d pay $1500 per month for a new three bedroom penthouse with views of the city and surrounding mountains. In SF, more like $9,000 per month.

    And as for the beauty of the women——-

    • Jeff says:

      I’m assuming that is $1,500 USD? Because it would be 4,389,480.1 Colombian Pesos a month!!

      The women sound nice….. just not sure about the drug lords for neighbors.

      • RDE says:

        Like most Americans your perception is about 20 years out of date. Violent crime rate is lower than some US cities like Oakland and Washington DC. And according to the WHO the medical care system ranks far above that in the US.

    • Ignim Brites says:

      Long live the Escobarian Revolution

  14. Joshua says:

    Hey Mr. Wolf I moved to the Bay Area from NYC about three years ago. When I got here you did not see for sale signs, houses would be sold before they ever hit the market. Now there is a for sale sign on almost every other block. I would just add to the story in saying when the Chinese finical market adjusted it seemed to have a very instant effect on The SF housing market. I even put out a tweet when it happened. Any way I believe your data is good just our market might not be the problem.

  15. TCG says:

    I wish I had some clue what would happen next with the San Francisco housing market since we’d really like to move someplace a little nicer (not near a very busy street) and a little closer (70 minute commute to Oakland for work from here for me). We’re in a far outer neighborhood in San Francisco.

    We’ve saved for years to get 20% down (not in the luxury market, though). I keep feeling that the market is racing away from us since decent things we could’ve got into 3 to 5 years ago are often nearly double the price now (more realistically 1.8x) for slightly closer or better transit areas. There are things we can afford that might be acceptable, but they are more of a reach than I feel very comfortable with. The higher prices also lock us into higher taxes than if we’d moved earlier when we didn’t have the down payment yet. We’re not seeing much for less than $1.2 million (likely to be bid up) that is even slightly better than where we are. Everything we’ve seen near or under $1 million has something (or many things) seriously wrong with it in any closer neighborhood.

    I keep hoping things collapse a bit before we buy since I think our jobs are more secure than many and not directly tied to the current silicon valley money flood or the rabid real estate speculation. I want to live here for the long haul and use a house for housing and living. The speculation feels a bit obscene.

    I keep hearing “this time it’s different” from silicon valley and “real estate always goes up if you hold long enough” from realtors. On one side I’m afraid if we don’t move now then the things we can afford will become worse and worse (from the current trend of getting worse every year). On the other hand I don’t want to buy something we can barely afford and risk being under water or losing the house if something unexpected comes up in our life. I wish I knew if home prices in the next few years would ever get significantly better or only worse.

    I know I’m one of the lucky ones since I’m at least not in danger of being homeless and live reasonably well in my current situation compared to what has happened to many non-valley people. The uncertainty makes me crazy.

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