The Story behind San Francisco’s “Extremely Low Inventory”
(It’s not because no one is selling)
Paragon Real Estate Group, April 2015
From another angle, studies have estimated that on average about 5% of U.S. owner-occupier homeowners sell annually. According to the census, there are approximately 125,000 owner-occupied housing units in SF: 5% would equal about 6250 home re-sales per year. Sales of tenant-occupied homes and new construction condos would be additional.
The numbers of new listings and home sales in San Francisco are certainly lower than expected in such a hot market and some of the subsidiary reasons (including homeowners deciding not to sell) are discussed at the end of this analysis. However, as seen above, annual sales numbers are not wildly out of whack from historical trends.
The principal factor behind the perception of drastically low inventory is simply hugely increased demand: Over the past 5 years, the city’s population and employment rolls have soared, while new housing construction has not remotely kept pace. Higher demand means homes sell more quickly, which then shrinks the number of listings on the market at any given time (which is really how we perceive supply, i.e. in the context of the time period in which a buyer is looking).
An analogy might help explain this: A water hole (of listings for sale) is fed by a relatively constant stream (of new listings coming on market), but it still gets significantly diminished as more people drink from it.
Below are 3 charts illustrating the issue. The first two, regarding days-on-market and percentage of listings accepting offers, are based on actual SF market statistics. The third chart is a sample illustration of the effect of increasing demand on the supply of homes for sale, even if the number of new listings coming on market doesn’t decline.
Chart 2: The percentage of listings selling each quarter has significantly increased.
Chart 3 (sample illustration): Higher demand – even with a constant number of new listings coming on market – dramatically decreases the inventory of homes for sale at any given time.
This illustration assumes 600 new MLS listings hitting the SF market each and every quarter, which is close to the average for recent years. In the real world it ebbs and flows by season and, to a lesser degree, sometimes by year.
There certainly are other, distinctive, but lesser factors exacerbating our low inventory market:
1) As noted earlier, with the frenzied market, more sales have been occurring off-MLS, and these homes usually won’t show up as new listings in the public inventory of listings for sale. (The Pros & Cons of Off-MLS Listings)
2) Annual sales of TIC units and 2-4 unit buildings have plunged in the last 7 years by over 500 sales, a substantial drop in an overall market of San Francisco’s size. This is probably due mostly to substantive changes in SF tenant eviction and condo conversion laws. (Note: TIC units are a property type found virtually no place else but the city.)
3) With extremely high rental rates and extremely low mortgage interest rates, a small but growing percentage of homeowners, who typically would have sold their homes, are renting them out instead – and the Airbnb vacation-rental phenomenon (with even higher rent rates) can only be adding to this. (Renting vs. Selling One’s Home)
4) Unless they’re moving out of the area, some potential sellers are so daunted by the challenge of finding new homes under existing market conditions, they are simply staying put until things calm down.
5) A sizeable percentage of our new (mostly very high-end) condos are being purchased as second homes by the locally affluent or as investments by foreign buyers. These non-resident buyers add to demand and help soak up supply, and for a number of reasons, may not sell as often as typical homeowners.
6) With the Bay Area jobs market so strong - it's the strongest in the nation - fewer people are relocating for new jobs elsewhere. They're finding them here instead.
In many counties other than San Francisco, the big decline in distressed property sales has affected inventory and sales.
The factors above are all probably diminishing listing inventory to greater or lesser degrees, but ultimately, it’s not that the annual number of new listings – i.e. the number of homeowners selling – is so drastically low by historical measures. It’s the relationshipbetween supply and demand that fundamentally determines market conditions, and for the last 3 years, a relatively stable supply has become terribly inadequate to a dramatically escalating demand.
This, of course, is the classic dynamic which puts upward pressure on home prices.