FAST FACTS

For November 2010, the Median Selling Price (MSP) for Single Family Residences (SFRs) recovered from the prior month but were still down 2% year-over-year. Condos were flat M/M and up 3.5% Y/Y

LOOKING BACK

Real Estate prices in California hit their peak in May 2007 and have dropped since then. Prices in San Francisco did not drop by as much, or as soon as they did statewide.

For October 2010, the statewide median price for an SFR was still down 49% from the market peak in May 2007. For San Francisco, using November numbers, SFRs are down 19% and Condos are down 15% from the market peak in May 2007.

Market prices began their decline on a statewide basis a full year before they began to decline in San Francisco.

Average monthly sales volume has improved this year compared to 2009. This volume improvement has led to a more stable, albeit relatively flat market through most of the last year.

LOOKING FORWARD

We are now in the slow season for real estate sales, which typically runs from November through January. During this time we normally see reduced inventories as sellers exit the market in the hope of more favorable conditions in the spring. This appears to be the case in many but not all neighborhoods.

The city-wide Unsold Inventory Index (UII) was 17-weeks for SFRs and 20-weeks for Condos in early December. This suggests a relatively balanced market for SFRs and a mild Buyer’s Market for Condos. However, these city-wide numbers mask big differences in market conditions between neighborhoods.

There is excess inventory and soft pricing for Condos in the North Eastern Neighborhoods such as SoMa, South Beach, Nob Hill, Telegraph Hill and others. The UII is well above 20 weeks in many of these areas. Expect condo prices in these areas to remain soft until the unsold inventory levels decline. This situation tends to predict further price declines looking forward.

The “condo surplus” is NOT manifested in all areas. The unsold inventory of Condos in Eureka Valley (Castro area), Noe Valley, Presidio Heights and other areas is running in the range of 7 – 9 weeks. This is characteristic of a strong Seller’s Market and prices for condos in these neighborhoods should remain firm, with an upward bias as we move past January.

For SFRs, inventories in the western and southern neighborhoods (Sunset, Ingleside, Excelsior) remains characteristic of a fairly balanced market. Because these are more “entry-level” neighborhoods there has been higher sales volume and more stable pricing in these areas over the last several quarters.

The central and northern neighborhoods are almost all in a low-inventory, Seller’s Market posture for SFRs at this moment. Neighborhoods with 7 – 10 weeks of unsold SFR inventory include Noe Valley, the Marina, Glen Park, Inner Sunset, the Castro and Forest Hill. This low level of inventory suggest firm pricing with an upward bias in these neighborhoods as we move past January.

Active buyers for SFRs in the central and northern neighborhoods are likely to be frustrated by the current lack of inventory and selection. If you’re in the market right now, you will need to pounce on anything you like over the next two months.

San Francisco is a city of roughly 44 hills and numerous valleys sitting at the tip of a peninsula. For roughly eight months of the year (March – October) there is a big difference between the air temperature over the Pacific Ocean (the marine layer, low 60′s) and the warm inland air temperature of the central San Joaquin Valley (90′s – 100+.)

This warm inland air rises and draws cooler air from the Pacific towards the inland areas. This draw, combined with the many hills and valleys of our city, including the various high coastal bluffs and low-lying beaches, create dramatic and pronounced micro climates within the city.

The cool coastal fog gets trapped in western and central low-lying areas. As air is drawn eastward through valleys and around elevated peaks, the fog burns off and the air temperature rises from the warming effect of the land.

The most commonly seen evidence of this phenomenon takes place when the fog is drawn through the lowest point in the bay area: The Golden Gate. On many occasions in the summer, you will see the “fog finger” move through “the gate” and be pulled north of Alcatraz into the East Bay hills from Berkeley up towards Richmond and then north and east.

However, this fog does not only come in through the gate. There are numerous points of dramatic elevation changes along the coast line from the high coastal bluffs of Sea Cliff, the Presidio and Fort Funston to the low, gradually sloping terrain we see moving east from Ocean Beach.

One of the most pronounced areas of change takes place in the Sunset District during the summer months, when the fog is “in.” As you travel from Ocean Beach at the western edge of the city towards Mount Sutro, the fog slowly thins out and burns off. It then hits a string of hills including Mount Sutro, Twin Peaks and Diamond Heights.

These hills often hold the fog from moving further east. In the lee of these hills are the neighborhoods known as Eureka Valley (aka The Castro), Noe Valley, Mission Dolores and the Inner Mission. You will often see a temperature difference of 5 – 10 degrees over a distance of roughly 2 to 3 miles from the Sunset to Eureka Valley.

An example is a four-unit building where four different people each own 25% of the building. Normally there will be a TIC agreement that functions like CC&Rs in a condominium. Another example would be two different parties who own a duplex. Because the units are not necessarily the same size, one may end up with a 55% ownership of the building while the other owns 45%. Buildings and ownership percentages do not have to be symmetrical and usually they are not.

A TIC is NOT a condominium! Technically, a TIC is not a property type at all. The terms condo or single family home denote a specific, legally-defined type of property. The actual legal property type in the case of TICs is a multi-family residential building. TIC refers to the ownership structure of that property type.

TICs are common in San Francisco for two main reasons. First, it’s cheaper to buy a duplex, triplex or other multi-unit building and then divide the living units among different owners. The per-unit cost is roughly 10% – 30% less than the equivalent condo. The price variance relative to a similar condo is driven mainly by the number of units in the building. A duplex will have the least variance compared to a similar condo, while TICs in buildings with five or more units will have the highest variance. This is driven by the byzantine rules governing condo conversion and the issues related to risk, financing and resale.

During the real estate boom of 1997 – 2007 there was a cottage industry of investors who would buy multi-unit rental properties, renovate them and sell them as TICs. There were also many private TIC groups formed by friends who found this to be a strategic way to buy and live in properties they otherwise could not afford.

The second reason TICs became popular was a simple imbalance in the supply and demand for affordable condos. While there has been strong and consistent demand, there has been almost no new supply. This is because of policy decisions by the San Francisco Board of Supervisors related to new construction, height restrictions and condo conversion laws.

There was some supply-side easing that began in the year 2000 time frame. Significant new condo construction took place around the new baseball stadium in SoMa, South Beach and Mission Bay. However, this supply increase, in these newly re-formed neighborhoods, did not satisfy the considerable demand for condos in many of the more traditional, well established and lower density neighborhoods.

Now that the real estate market is in a price recession, there is an over-supply of condos and one of the two primary drivers for new TIC formations has largely disappeared.

There are very important ramifications to owning a TIC versus a Condo. Foremost among these is how the loan is structured. If it is a group loan, then each party is JOINTLY AND SEVERALLY liable for the loan and the monthly payment. If one party cannot make their portion of the total payment, or worse, declares bankruptcy, it can have a very significant and entirely negative impact on all the other parties. In order to reduce the financial and legal risks for everyone, TIC agreements have become sophisticated contracts that normally contain provisions for default funds and have Forced Sale clauses in case things go wrong.

In addition to financial risk, group loans for TICs create problems when one party wants to sell. Selling a TIC with a group loan is much more difficult than selling a condo. This is because the sale of a fraction of the building to a new buyer will either require a new group loan (and therefore an expensive refinancing at prevailing interest rates) or a partial loan assumption. Neither of these is easy to arrange and the other owners have an effective veto if they are negatively impacted. Seller carry-backs are a frequent solution but don’t result in the seller cashing out his or her equity.

To eliminate the risk and the problems created by group loans, several boutique lenders have created Fractional Loans. These took TIC ownership a major step forward in their emulation of condo ownership. A fractional loan indemnifies the borrower from all other owners and borrowers on the property. This is a loan specifically for the fraction of the property owned by the borrower. The non-payment or bankruptcy of other fractional owners does not impact the owner with a fractional loan. In addition, the fractional loan can be independently refinanced and this means that these TICs are much easier to re-sell.

Unfortunately, there is a down-side to fractional loans, which is cost. The interest rates for a fractional loan are normally 1.5% – 2% higher than a conventional loan. They also have higher closing costs and higher down payment requirements. When considering the impact on the typical monthly payment, this eliminates the price advantage enjoyed by most TICs. In other words, the monthly carrying cost of a TIC with a fractional loan ends up being the same as the comparable condo, which puts most buyers back into the condo market.

Condo conversion is the holy grail of TIC ownership and offers the allure of real wealth creation. There is a clear and transformative value-add that can be another motivation for TICs ownership. In the early days of TIC formations, the common wisdom was that this ownership structure was not appropriate for people who did not have a 10-year ownership horizon, which was the required amount of time to get through the condo conversion process. There is an annual condo conversion lottery in San Francisco that allows the winners to convert multi-unit buildings into condominiums. The rules are different, depending on the size of the building. There are four different sets of rules for the four different building categories, summarized briefly here:

1. 2-unit buildings - If both units have been owner occupied for one full year and there have been no disqualifying evictions, then the property can bypass the condo conversion lottery. The owners must go through a process which usually requires some infrastructure upgrades for fire safety and power metering, among other things. After completion of these upgrades and the creation of legal documents, such as CC&Rs, budgets, etc., the building can be converted without further discretionary review by the city.
2. 3-4 unit buildings - These properties must go through the condo lottery. It will normally take ten years to achieve this but can take longer, or may never be achieved if there is not a continuous thread of qualifying owners, or if there is a disqualifying eviction on the property. In order to qualify to be in the lottery, which takes place once per year, the building must have at least one unit that has been owner-occupied for at least three years and that unit must represents a minimum ownership of 25% of the entire building.

   A building may be qualified by virtue of an owner who meets all these requirements but if that owner moves out and there were no other qualifying owners, then the building would lose eligibility and would have to start from the beginning when eligibility is reestablished.

   The chances of winning the lottery go up very significantly with each consecutive time the building is in the lottery. Buildings in the lottery for the first through third times have a nearly zero chance of winning, while buildings in the lottery for the sixth or seventh time have a high and sometimes nearly certain chance of winning.

3. 5-6 unit buildings - The requirement is that a minimum of two units be owner occupied for a minimum of three years, along with other minimum ownership percentage requirements. The same basic rules of process apply for this category as for the 3-4 unit category.
4. 7+ unit buildings are not eligible for condo conversion under any circumstances. This does not mean that there are no TICs in these larger buildings, as in fact there are. Fractional lending has made this a possibility and these properties tend to behave somewhat similar to condos. The lower purchase price is mostly but not entirely offset by the higher loan rates. These properties tend to be in the more exotic locations and the most in-demand, higher density neighborhoods of the city, such as Russian Hill and Nob Hill.

There are numerous types of evictions and several of these may permanently disqualify a property from being converted to condos. Ellis Act evictions, evictions of protected tenants, multiple Owner Move-In (OMI) evictions or just multiple evictions, depending on the number of units in the building, can disqualify a property’s eligibility for conversion.

The Outer Sunset/Parkside is a large residential area at the western edge of the city. The area is predominantly single family homes, which were {sfr_percent} of sales over the last year. There are some relatively new and mid-century condos along the Great Highway and La Playa.

The Outer Sunset is known for fog and various forms of surfing at Ocean Beach. Many residents are avid surfers, windsurfers and/or kitessurfers attracted by the relatively low prices and easy access to the ocean.

There are retail shopping and dining areas along Irving, Noriega and Taraval and major transportation lines along Judah and Taraval. These street car lines become underground subways after they travel a little further east.

The homes in this area are relatively homogenous and were originally built be highly affordable. They are known as Doelger homes, named after the builder, and have a reputation for being well built.

The northern part of the Outer Sunset/Parkside borders the southwestern edge of Golden Gate Park. This offers residents easy access to a tremendous number of resources and events for recreation, education and culture. Golden Gate Park is one of the crown jewels of San Francisco and an enormous benefit for those living nearby.

The southern part of the neighborhood borders the San Francisco Zoo, Lake Merced and Fort Funston. This is also an excellent destination for recreation, including hang-gliding at Fort Funston.

San Francisco can get fogged in, off and on, during the summer months when the marine layer (fog) is drawn in from the Pacific Ocean by the rising hot air of the central valley. Some summers are worse than others and the entire city still enjoys a large number of beautiful, warm sunny days throughout the year. The Central Sunset/Parkside is one of the first neighborhoods to be affected by fog.

The Central Sunset/Parkside is a large residential area near the western edge of the city. The area is predominantly single family homes, which were {sfr_percent} of sales over the last year.

There are retail shopping and dining areas along Irving, Noriega and Taraval and major transportation lines along Judah and Taraval. These street car lines become underground subways after they travel a little further east.

The homes in this area are relatively homogenous and were originally built be highly affordable. They are known as Doelger homes, named after the builder, and have a reputation for being well built.

The northern part of the Central Parkside borders the southeastern edge of Golden Gate Park. This offers residents easy access to a tremendous number of resources and events for recreation, education and culture. Golden Gate Park is one of the crown jewels of San Francisco and an enormous benefit for those living nearby.

The southern part of the neighborhood borders Stern Grove and Pine Lake Park. This is also an excellent destination for recreation and culture, including an annual Shakespeare in the Park festival.

San Francisco can get fogged in, off and on, during the summer months when the marine layer (fog) is drawn in from the Pacific Ocean by the rising hot air of the central valley. Some summers are worse than others and the entire city still enjoys a large number of beautiful, warm sunny days throughout the year. The Central Sunset/Parkside is one of the first neighborhoods to be affected by fog.

The Outer Richmond sits at the north western edge of San Francisco. It is surrounded on three sides by major parks and the Pacific Ocean.

The housing stock is a predominantly single family homes, which were {sfr_percent} of sales over the last year. Condos and Duplexes filled out most of the rest of unit sales.

Residents of the Outer Richmond enjoy direct access to Land’s End and to the north and Golden Gate Park to the south. Just slightly further south is Ocean Beach which offers advanced surfing, windsurfing and kitesurfing.

Major bus service along both California and Geary provides excellent mass transit to the downtown financial district and many other parts of the city.

San Francisco can be highly affected by fog from the Pacific Ocean. This mostly happens, off and on, during the summer months. Some summers are worse than others and most of the city still enjoys a large number of sunny days throughout the year.

The Outer Richmond is directly adjacent to the Pacific Ocean and can be quite foggy from time to time. The high bluffs along Land’s End will sometimes hold the fog back.

However, the low lying area of the Outer Sunset and is an open door to the powerful draw of air from the hot central valley that pulls the marine layer in from the ocean.

The Central Richmond is a relatively affluent neighborhood that is adjacent to some of the most expensive neighborhoods in San Francisco including Sea Cliff and Lake Street.

The housing stock is a diverse mixture of single family homes, condos, duplexes and TICs. The largest property type in terms of unit sales over the last year was single family homes, which were {sfr_percent} of unit sales.

Residents of the Central Richmond enjoy direct access to Land’s End and the Presidio to the north and Golden Gate Park to the south.

The main retail shopping and dining area is along Geary Street. Major bus service along both California and Geary provides excellent mass transit to the downtown financial district and many other parts of the city.

San Francisco can be highly affected by fog from the Pacific Ocean. This mostly happens, off and on, during the summer months. Some summers are worse than others and most of the city still enjoys a large number of sunny days throughout the year.

The Central Richmond is fairly close to the Pacific Ocean and can be quite foggy from time to time. The high bluffs along Land’s End will sometimes hold the fog back.

However, the low lying areas of the Outer Richmond and Outer Sunset are an open door to the powerful draw of air from the hot central valley that pulls the marine layer in from the ocean.

The Lake Street district is a long narrow strip of homes along the southern edge of the Presidio, north of the Central and Inner Richmond.

Lake Street is a quiet and affluent neighborhood that is just a little more affordable than either Presidio Heights or Sea Cliff, which border this area to the east and west respectively.

The housing stock is a mixture of property types including single family homes, condos, TICs and duplexes. However, the largest category is single family homes, which were {sfr_percent} of unit sales in the last year.

While {condo_percent} of sales were condos and {teni_percent} were TICs, most of these properties are in smaller-format buildings with four units or less.

The Lake Street district is divided into two nearly equal halves by Park Presidio Boulevard, which is a major artery that connects to the Golden Gate Bridge and Highway 101. The eastern half enjoys direct access to Mountain Lake Park, which is a wonderful but little-known city park that is contiguous with the Presidio.

There are many shops and restaurants along Clement Street in the eastern half of the Lake Street district and also all along Geary Street, on both sides of the neighborhood. These are within a short walk from Lake. The section along Clement Street has a very pronounced Asian character from 12th to 4th Avenue and then becomes more “Gringo” between 4th and Arguello.

Major bus service along both California and Geary provides excellent mass transit to the downtown financial district and many other parts of the city.

San Francisco can be highly affected by fog from the Pacific Ocean. This mostly happens, off and on, during the summer months. Some summers are worse than others and most of the city still enjoys a large number of sunny days throughout the year.

Lake Street is very close to the Pacific Ocean and can be quite foggy from time to time. The high bluffs along Land’s End, Sea Cliff and the western edge of the Presidio will sometimes hold the fog back. However, the low lying areas of the Outer Richmond and Outer Sunset are an open door to the powerful draw of air from the hot central valley that pulls the marine layer in from the ocean.

Greater West Portal refers to a cluster of small, but very affluent neighborhoods that wrap around most of Mount Davidson. This group includes the areas formally known as:

• Forest Hill
• Forest Hill Extension
• West Portal
• St. Francis Wood
• Sherwood Forest
• Westwood Highlands
• Monterey Heights
• Balboa Terrace
• Mount Davidson Manor
• Ingleside Terrace

The Price Survey chart shows the median selling price for most of these individual areas. The rest of the charts on this site are based on the aggregate sales data for all of these areas combined.

This is done to increase the sample size (amount of data) because otherwise the individual areas are too small to conduct meaningful statistical analysis.

These neighborhoods all have several important similarities. They are all upscale areas with large homes that are more suburban in character than most of the other single family homes in San Francisco.

The vast majority of these homes are fully detached and sit on much larger lots than the average city home. These large lots enable the homes to be set back much further from the street and facilitate a green, tree-lined streetscape with beautiful lawns and gardens.

By contrast, most other SFRs throughout the city are on 25-foot wide by 100-foot deep lots. These homes normally touch each other and were built so close to the street there is no room to park a car in front without blocking the sidewalk.

The homes in these areas are also suburban in that, for the most part, there is no easily accessible shopping district within walking distance. The exceptions are West Portal, St. Francis Wood and the areas along the Ocean Street corridor.

The Forest Hill and West Portal Muni stations are a major junction for different bus lines and provide an underground subway station. This supports three different subway lines that link to the downtown financial district and numerous other popular neighborhoods.