It’s no secret that it’s been a good year for San Francisco real estate. A few months ago, you would have thought the world’s entire remaining supply of money was about to be instantly distributed to Facebook employees and laundered into real estate. I took a contrarian attitude at the time, arguing that price increases in the market were driven more by an imbalance of demand and supply. Facebook stock hit the market, belly-flopped hard (in the short term, at least), and well, I….
I ran some quick stats on the market for this year, and so far the average sales price for single family homes is up from 6% to 11%, depending on how you do the math. For those of you that are detail oriented, here’s the breakdown. Remember, this is only for single family homes in San Francisco, and doesn’t include condos, TICs, lofts, or residential unit buildings:
- Average sales price = + 11.00%
- Median sales price = + 8.26%
- Average $/Sq.Ft. = + 7.04%
- Median $/Sq.Ft. = + 5.91%
It’s no secret that it has been a good year to be a seller and a tough year to be a buyer, particularly when you consider that last year there were an average of 6.75 homes sales per day in San Francisco, while this year the average number of homes sold per day is down to 4.92. For those of you who believe in rounding, that means we’ve gone from selling 7 homes a day to 5, and if that decrease stays constant through the rest of the year, we will have sold 730 fewer homes this year – a huge decrease in supply!
But what about the long-term? Is this just a itty-bitty bubble? A temporary anomaly? A moment of insanity?
I’d argue that while San Francisco (or anyplace else) won’t be able to sustain consistent annual appreciation in the high single digit to low double digit range (you know, like the 6 – 11% range above), the long term picture for San Francisco real estate is incredibly optimistic (the sky’s the limit…) because of structural changes in America. I could sum it all up like this: The kids don’t want cars.
But first, I’d like to take a moment to recommend the book: This Time is Different, Eight Centuries of Financial Folly. Things will go up, things will go down. This isn’t an article about timing the market, because I have yet to see anyone succeed at that (on purpose, at least). The future is not coated in sugar, thinner than an iPhone 5 and lighter than air. I am not saying that we are headed in one direction (up) exclusively, and for the rest of eternity.
An article in this week’s The Economist titled “Seeing the back of the car” makes a convincing case that in the developed world, we’ve already passed “peak car” and that car use is on the decline. While San Francisco’s transit first policy may seem infuriating when you are shopping for a condo and want a parking spot, it may be spot (excuse the pun) on. Car usage is down, measured either by total vehicle miles driven or number of trips taken. While I highly recommend you read the entire article, here’s a brief excerpt:
… in terms of urban living the car has become a victim of its own success [emphasis added by me]. In 1994 the physicist Cesare Marchetti argued that people budget an average travel time of around one hour getting to work; they are unwilling to spend more. For decades cars allowed this budget to go farther. But as suburbs grow and congestion increases most cities eventually hit a “sprawl wall” of too-long commutes beyond which they will not spread far. After that, it appears, a significant number of people start to move back towards the city centre. In America, where over 50% of the population lives in suburbs, more than half the nation’s 51 largest cities are seeing more growth in the core than outside it, according to William Frey at the Brookings Institution.
The car was (almost literally) the fuel that drove the creation of suburbia. If kids are getting their drivers licenses later (which they are), people are driving less (which they are), and public transit usage is up amongst the young (which it is – by 100% between 2001 and 2009, according to one study by the Frontier Group) then the news for suburbia can only be grim. And suburbia’s loss is San Francisco’s gain.
Before you write this off as just another overly saccharine real estate dream, Robert Shiller (co-creator of the Case-Shiller housing index) was quoted in April of this year as saying “The heyday of exurbs may well be behind us,” which should make you stop and think. For the first time in 20 years, American cities are growing faster than the suburbs or exurbs.
So we’ve established that the young are start driving later and driving less, making cities a more attractive option. That’s one demographic trend. Guess what other demographic group also finds cities more attractive? The “silver-tsunami” of baby boomers that are rapidly aging. Independence in suburbia requires a driver’s license, but dense cities with public transit offer an alternative to becoming a suburban shut-in: give up your driver’s license without giving up your independence.
So we’ve got two demographic trends that favor cities, but wait – that’s not all! (keep reading and I’ll throw in the ginsu knives).
The internet, despite it’s incredible ability to disseminate information and connect disparate people, has created a somewhat counter-intuitive effect: where you live matters. It’s known as the multiplier effect, and you can read all about it in “The New Geography of Jobs” by local (Berkeley) economist Enrico Moretti. In essence, Moretti argues that smart, well-educated people tend to congregate with other smart, well-educated people, and this creates a multiplier effect. And just south of San Francisco – in the suburbs – is the world’s hub of innovation: Silicon Valley.
So let’s review: The young are driving less. The elderly can remain independent for much longer in a city without a car, unlike in Suburbia. And innovators want to live next door to other innovators. This is what one of our former presidents called arithmetic. I’d say the math is skewed pretty strongly in favor of San Francisco, what about you?