While sales activity for new condos in San Francisco doubled from April to May with seasonality in play, versus tripling from April to May last year, the number of purchase contracts signed last month (73) was 36 percent lower on a year-over-year basis, according to sales data from The Mark Company.

And the volume of new contract signings over the past twelve months remains 19 percent lower than the twelve months before despite having had an average of 55 percent more inventory from which to choose.

That being said, with a slowdown in the delivery of major new projects, the inventory of new construction condos available to purchase in San Francisco (877) is now running 29 percent lower on a year-over-year basis, the first year-over-year decline in a year.

But despite the decrease in inventory, which typically pushes prices up, the Mark Company’s pricing index for new construction condos in San Francisco dropped another 0.7 percent in May and is now running 11.2 percent lower on a year-over-year basis and 13.4 percent below its August 2015 peak.

Keep in mind that there are around 5,600 units of housing under construction across the city, which does include projects slated for both sales and rentals, but the pipeline has been slowing.

An in related news, did we mention the 11.4 percent list price cut for the Lumina Tower D penthouse unit #36A earlier this week?

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Comments from “Plugged-In” Readers

  1. Posted by Dave

    So 5600 units under construction which should be available in the next two years. The city will drop under building 3K units/year which it only broke above last year. Given the softening prices, in the years beyond when the 5600 come online, a continued drop in units coming to market seems likely. Perhaps 2K/year through 2025 for 18K total at a time when Seattle will build 45K in that same period.

    The sad thing is that during the boom times there was not a strong affordable requirement in place for new developments. There is now with Prop C, but the horses are out of the barn and a sharp drop in condo/residential development means that the new guidelines won’t have the impact they would have had a few years back.

    Longer term, with jobs softening in SF a population drop will likely follow assuming the job weakness lasts for a number of years. The 10K gain last year could well be followed by a similar loss this year. The good thing is that projections that SF could reach a million residents in 20 years seem increasingly dubious in light of the economic situation. I could see the city dropping back closer to its historic 750K population. Not quite that few, but maybe around 800K. That would throw the pipeline housing plans for a loop, but leave Lennar, PM and the Giant’s in a good position given their flexibility to slow walk their proposals as needed.

    This too should reduce calls for greater density outside of designated areas such as the projects above, as that density may simply not be needed. Is Hub 2.0 still economically viable?

    • Posted by aerel

      Wow. That is an impressive run of unsubstantiated speculations you’ve strung together there…

      • Posted by Dave

        Note I qualified my “speculations”. It’s all speculation ahead of time, but that does not preclude one from taking trends and extrapolating them into the future.

        Condo prices are softening, the labor force is starting to fall. Note the employment graph in the article posted below this one – labor force fell starting in 2001 and did not come back to its earlier level for almost 9 years. Add to that the new factor of places like Seattle and LA becoming more competitive than before with the BA. In LA’ s case, it’s building a potentially great public transportation system while the Bay Area is not..

        The Bay Area Council poll found a large percentage of millennials wanting to move onto greener pastures – those Seattle hills sure are green.

        My informed speculation leads me to believe SF’s population will drop back to 2011 levels in the next decade and that the labor force will have see a definite decline with tech jobs seeing no growth as a percentage of the SF workforce and maybe declining some percentagewise.

        If this happens it has all sorts of ramifications for residential and office development in SF and, most importantly, the debate around density.

        • Posted by SFRealist

          I wouldn’t count on it. The collapse in 2000 was due to the collapse of garbage companies like Webvan.

          Our economy today is driven by Apple and Google.

          A much more like scenario is that SF keeps growing and attracting top talent. The tech economy is already too big for one city or region so Seattle, Boston, and LA will also grow.

          • Posted by Sabbie

            Wrong. The epic failures of the dot com bubble like Webvan are well represented today by garbage startups from delivery to social media to outright scams like Juicero and Theranos. But there were also plenty of large successful internet driven companies from that bubble that have survived including Amazon, ebay, Cisco, Oracle, Priceline, Shutterfly, Verisign, etc. Not to mention Apple was around then too. The point being, not even a solid core of stable companies can keep the greater market from having a major correction from irrational exuberance.

          • Posted by SFRealist

            Apple’s market cap in 2001 was about 6 billion. Today it’s market cap is about 760 billion. Google and Facebook were zero. Today they’re 660 and 440 billion. Likewise Amazon, though it has less impact on SF real estate.

            Do you also believe that Salesforce, Twitter, Yelp, Square, Airbnb, Uber/Lyft (all of which are headquartered in SF) are going to collapse like Webvan?

          • Posted by Dave

            My expectation about the jobs and housing situation in SF over the next decade is not based on 2000 at all.

            What I see is the Bay Area as a whole losing a part of its tech dominance to other areas like Boston, Seattle, Portland, Austin and such. The tech job growth will shift somewhat to other regions. It does not mean there won’t be tech job growth in the BA.

            The affordability index works against SF and the BA. other metros are significantly more affordable and some, like Seattle, have aggressive affordability programs to avoid the mistake of the BA. Not just housing availability but regional job dispersion. The quality of life situation here, which has many millennials ready to seek greener hills, is about more than just housing prices..

            Tech is centered in the Valley and much of SF’s tech is thanks to a spillover effect. There are exceptions like Salesforce and Twitter. In the latter’s case, however, a takeover seems possible and the company could well relocate out of the city. Twitter is freeing up space to the sublease market as, per the latest numbers at SS, are other tech companies.

            There are other factors too and we won’t know which of us is correct for a while yet. Though the signs right now seem more to “favor” my prediction.

          • Posted by SFRealist

            Tech was centered in SV 20 years ago. All of the firms I mentioned (and there are plenty of others) are HQ’d in SF. Like it or no, the new center of tech is SF.

    • Posted by E. Gonsalves

      The biggest threat to SF is not Seattle and LA but Oakland and the East Bay. SF is becoming overcrowded and over priced. SF’s unnatural location as the “business center” of the Bay Area also is responsible for much of our regional traffic congestion and gridlock. Oakland and the East Bay can handle far more growth in a more environmentally friendly way than can bridge dependent San Francisco.

  2. Posted by two beers

    “But despite the decrease in inventory, which typically pushes prices up, the Mark Company’s pricing index for new construction condos in San Francisco dropped another 0.7 percent in May and is now running 11.2 percent lower on a year-over-year basis and 13.4 percent below its August 2015 peak.”

    b-b-but, this runs counter to the S&D graph in my Econ 1 textbook which we all know is the sole explanation for all price movement. This is heresy! I suppose SS editor will now tell us the earth revolves around the sun. We must not let data and empiricism get in the way of our beautiful (and ever so profitable…) theories.

    • Posted by anon

      The problem is that there is no “data and empiricism” in this post. There is a black box “Mark Company’s pricing index for new construction condos.” Nobody knows anything about the inputs, the analysis, any efforts to adjust for sampling errors or discrepancies, or the bases for the conclusions. It is a completely worthless indicator of anything, no more reliable than an anonymous internet commenter stating “in my view, prices are up/down x%.” You can try to disprove the law of supply and demand, but this sure doesn’t help move that hypothesis forward a whit.

      • Posted by bachman_erlich_overdrive

        The first rule of Fight Club is don’t talk about Fight Club.

        I have raised this point about the Mark Company data before. The counter will be that “If anyone has an interest in over-selling pricing of condos, it’s the guys in fancy jackets and nice socks hired to sell the condos (which the Mark Company helps to do in many cases) so they are probably OVER stating the market.

        A second order observation might be that the Marketing guys want to promote the idea that prices are coming down, to moderate the expectations of their developer clients (keep product moving) and to entice new buyers who might feel they are getting a discount.

        The rebuttal to the last point is something about no one wanting to catch a falling knife, but if the knives are falling it’s because all of the service workers have been priced out of the city.

        Supply and demand are of course at play in the housing market (Eric Fischer’s 2016 study fairly accessible and relevant) and so as we have more new condos being offered for sale, it’s reasonable to expect prices to soften somewhat. Still, in the long run, Fischer concludes:

        “Building enough housing to roll back prices to the “good old days” is probably not realistic, because the necessary construction rates were never achieved even when planning and zoning were considerably less restrictive than they are now. Building enough to compensate for the growing economy is a somewhat more realistic goal and would keep things from getting worse.

        In the long run, San Francisco’s CPI-adjusted average income is growing by 1.72% per year, and the number of employed people is growing by 0.326% per year, which together (if you believe the first model) will raise CPI-adjusted housing costs by 3.8% per year. Therefore, if price stability is the goal, the city and its citizens should try to increase the housing supply by an average of 1.5% per year (which is about 3.75 times the general rate since 1975, and with the current inventory would mean 5700 units per year). If visual stability is the goal instead, prices will probably continue to rise uncontrollably.”

        So, if we have 5,600 units in production across the city, that’s nice, but it won’t approach the estimate needed for a single year for price ‘stability.’

      • Posted by two beers

        Any physicist would keel over in laughter at the concept of a “law of supply and demand.” S&D is a theory, one that has been accorded unassailable standing with the erroneous misnomer, “law.”

        I’m not trying to “disprove” the “law(sic) of supply and demand.” I am merely pointing out that S&D is only one of various factors affecting price; that it is not always necessarily even the most important factor affecting price; that price equilibrium only exists in textbooks (and not in the real world); that the relationship between S&D isn’t the smooth, linear, inverse function that every clown who has taken Econ 1 is mistakenly led to believe it is (eg, they’re called “curves,” because their rate of change isn’t linear, but they are typically represented in Econ 1 textbooks as straight lines).

        The creation of supply is the source of income for most of the readers of this forum. When you have only a hammer (let alone that that hammer is your source of income), every problem is a nail. Many of us who aren’t in the supply pipeline see the crisis as a function of market distortions (eg, excess liquidity, generous tax incentives, etc) on the demand side that have led to a bubble. IOW, the demand side has a substantial artificial composition. You can’t build out of a bubble. Bubble’s only end when either conditions that led to the artifical composition of demand change.

        If prices are going down while supply is decreasing, then the sacred Econ 1 S&D curve isn’t working quite the way we all were taught. Ceteris paribus exists only in textbooks, never in the real world.

        • Posted by SFRealist

          Pricing is actually set by supply AND demand. So it’s perfectly possible for prices to go down while supply is decreasing.

          • Posted by two beers

            I’ve been scolded here many times that the only way to make (all) housing more affordable is to increase the supply of market rate housing. If supply is now decreasing, how can this be?

          • Posted by SFRealist

            Supply is not decreasing (i.e. we are not destroying buildings). The number of homes in SF is increasing. But when demand in increasing at a faster rate than supply, prices rise.

            Lately, it seems that our rate of increasing supply has been about equal to demand, so prices are stable.

  3. Posted by Oaklandlover

    181 Fremont just keeps looking better and better as it finishes, as this picture shows. I wish they built it up another 25 stories with another middle type section and more long slanted angles like the prior section, narrowing it further at the top, and making it taller than the boooooring sales force tower, which has a crappy name as well. Shoulda left it named as the transbay tower. It’s a shame that is our tallest tower.

    But I digress from topic at hand just commenting on the great picture.

    • Posted by more housing please

      I wasn’t a fan of the Salesforce Tower. But now seeing it in person, it’s a conservative brand of stylishness. It’s not bad, subdued. Though I’d be excited if we could get some genuine architecture that marks the city like the Shanghai Tower. Hoping the Oceanwide building looks nice in person.

  4. Posted by Richard

    Agree! Another vertical sweep would give 181 Fremont a perfect symmetry but the numbers probably didn’t pencil out.

  5. Posted by 101

    Prices dropping are still keeping the majority of people not being able to afford these units. I am sure the developers are looking at this situation but they are still getting a reasonable return on their developments. Prices are still high compared to cities like Seattle and Portland. Barring a recession or GFC, there will still be developments in this City, IMO.

    • Posted by two beers

      “Prices dropping are still keeping the majority of people not being able to afford these units.”

      Prices have just started dropping. They may never be “affordable,” but they will move towards the mean, even if they don’t revert fully back. How can they? The market is rigged to boost asset values. Banks can take millions of properties off the market indefintitely, artifically suppressing supply. Historically low interest rates and extemely generous tax benefits (eg. Prop 13, low capital gains taxes, et al) artificially boost demand. There’s nothing wrong with advocating for policies that increase one’s income and wealth, but I think it’s disingenuous to do so while pretending those policies will benefit the housing precariat.

      There will be development as long as development is profitable. As the high end market crashes, development will move to progressively lower-tier markets, disproving the canard that developers have to build luxury lofts, because those are the only properties they can make a profit on. Developers build luxury lofts only because they are currently the most profitable projects. This is now changing, so I think we will begin to see a mix of development that more accurately reflects the real (non-speculative) demand.

      • Posted by Dave

        Developers build what they can get away with building. Left to their own devices they’d build only “luxury” lofts. The major failure of “progressive” SF was in not demanding more affordable developments (and decent architecture) during the recent boom. We were told that nothing would get built if developers had to have a more affordable mix – of course that was false. Hate to come back to Seattle, well not really, but that city has a 40% affordable requirement and has had for a while and developers are flocking there. Building 5K new units per year and it could go north of that in the coming years with the population growth there.

  6. Posted by sfdragonboy

    I still say the market is falling apart for condos in general and that could explain why the supply decrease is not causing any corresponding uptick in demand and hence pricing is still dropping. One would think at some point if pricing dropped far enough more people would then want them but I think there is still plenty of room to go.

  7. Posted by Brahma (incensed renter)

    Sure, if pricing dropped far enough more people would then want them. Lots and lots of people want them now; those same people don’t have six figures in sourced and seasoned funds to cover a down payment on said condos, largely because when they are forking over 40 and sometimes 50% of take-home pay in rent, it’s very difficult to accumulate the funds for a 20% down payment.

    I’d love to be proven wrong, but as someone who was around during the “dot bomb” implosion, I’d be willing to bet that prices won’t go appreciably (“far enough”) lower. Once lower prices start having a measurable impact on the market, banks will taper off lending on non-luxury multifamily projects and then developers will stop building and sit on their land holdings until prices recover.

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