Recessions, Recoveries & Bubbles: 30 Years of Housing Market Cycles in San Francisco & Marin

25 Aug

Recessions, Recoveries & Bubbles: 30 Years of Housing Market Cycles in San Francisco & Marin

Below is a look at the past 30+ years of San Francisco Bay Area real estate boom and bust cycles. Financial-market cycles have been around for hundreds of years, all the way back to the Dutch tulip mania of the 1600’s. While future cycles will vary in their details, the causes, effects and trend lines are often quite similar. Looking at cycles gives us more context to how the market works over time and where it may be going — much more than dwelling in the immediacy of the present with excitable pronouncements of “The market’s crashing and won’t recover in our lifetimes!” or “The market’s crazy hot and the only place it can go is up!”

Note: Most of these charts generally apply to higher-priced Bay Area housing markets, such as those found in much of San Francisco, Marin and San Mateo Counties. (Different market price segments had bubbles, crashes and recoveries of differing magnitudes in the last cycle.)

Market Cycles: Simplified Overviews

Up, Down, Flat, Up, Down, Flat…(Repeat)

The first chart below charts changes in dollar values, according to the Case-Shiller Index method (January 2000 = a home value of 100). The second chart graphs ups and downs by percentage changes at each turning point.

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Smoothing out the bumps delivers the simplified overviews above for the past 30 years. Whatever the phase of the cycle, up or down, while it’s going on people think it will last forever: Every time the market crashes, the consensus becomes that real estate won’t recover for decades. But the economy mends, the population grows, people start families, inflation builds up over the years, and repressed demand of those who want to own their own homes builds up. In the early eighties, mid-nineties and in 2012, after about 4 years of a recessionary housing market, this repressed demand jumps back in (or “explodes” might be a good description) and prices start to rise again. It’s not unusual for a big surge in values to occur in the first couple of years after a recovery begins.

All bubbles are ultimately based on irrational and/or criminal behavior, whether exemplified by junk bonds, Savings & Loan frauds, dotcom stock hysteria, “Dow 30,000″ exuberance, “the end of the business cycle” nonsense, gorging on unsustainable debt, runaway greed (without any corresponding desire to produce anything of value) or dishonest financial engineering, but the most recent subprime-financing/ loan-fraud bubble was even more abnormal than usual, because it was fueled by large numbers of buyers purchasing homes that they clearly couldn’t afford (liar loans, deceptive teaser rates and the abysmal decline in underwriting standards) with no actual investment in the properties being bought (no down payment, 100%+ loans).

This Recovery vs. Previous Recoveries
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The light blue columns in the above chart graph the home-value appreciation that occurred in the first three years of each recovery – our latest rebound has been somewhat quicker than other recoveries, probably due to 1) the depth of the previous market decline, and 2) the huge, high-tech employment, population and wealth boom that has played out in San Francisco and nearby counties. (Not shown on chart: appreciation has continued in the first half of 2015, bringing total recovery appreciation since 2012 to approximately 57%.) The gray columns chart the appreciation of past recoveries from the beginning to peak value for each cycle, and the red bars delineate the percentage declines from those peaks, pursuant to the market adjustments that occurred. As always, note that market appreciation and depreciation rates can vary widely by county, community and neighborhood.

Surprisingly consistent: Over the past 30+ years, the period between a recovery beginning and a bubble popping has run 5 to 7 years. We are currently about 3.5 years into the current recovery, which started in early 2012. Periods of market recession/doldrums following the popping of a bubble have typically lasted about 4 years. (The 2001 dotcom bubble and 9-11 crisis drop being the exception.) Generally speaking, within about 2 years of a new recovery commencing, previous peak values (i.e. those at the height of the previous bubble) are re-attained — among other reasons, there is the recapture of inflation during the doldrums years. In this current recovery, those homes hit hardest by the subprime loan crisis — typically housing at the lowest end of the price scale in the less affluent neighborhoods, which experienced by far the biggest bubble and biggest crash — are taking longer to re-attain peak values. However, higher priced homes — which predominate in San Francisco, Marin and San Mateo Counties — have already surged past their previous peaks.

This does not mean that these recently recurring time periods necessarily reflect some natural law in housing market cycles, or that they can be relied upon to predict the future. Real estate markets can be affected by a bewildering number of economic, political and even natural-event factors that are exceedingly difficult to predict.

In the 2 charts below tracking the S&P Case-Shiller Home Price Index for the 5-County San Francisco Metro Area, the data points refer to home values as a percentage of those in January 2000. January 2000 equals 100 on the trend line: 66 means prices were 66% of those in January 2000; 175 signifies prices 75% higher.

1983 through 1995

(After Recession) Boom, Decline, Doldrums

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In the above chart, the country is just coming out of the late seventies, early eighties recession – huge inflation, stagnant economy (“stagflation”) and incredibly high interest rates (hitting 18%). As the economy recovered, the housing market started to appreciate and this surge in values began to accelerate deeper into the decade. Over 6 years, the market appreciated about 100%. Finally, the eighties version of irrational exuberance — junk bonds, stock market swindles, the Savings & Loan implosion, as well as the late 1989 earthquake here in the Bay Area — ended the party.

Recession arrived, home prices sank, sales activity plunged and the market stayed basically flat for 4 to 5 years. Still, even after the decline, home values were 70% higher than when the boom began in 1984.

1996 to Present

(After Recession) Boom, Bubble, Crash, Doldrums, Recovery

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This next cycle looks similar but elongated. In 1996, after years of recession, the market suddenly took off and continued to accelerate til 2001. The dotcom bubble pop and September 2001 attacks created a market hiccup, but then the subprime and refinance insanity, degraded loan underwriting standards, mortgage securitization, and claims that real estate never declines, super-charged a housing bubble. Overall, from 1996 to 2006/2008, the market went through an astounding period of appreciation. (Different areas hit peak values at times from 2006 to early 2008.) The air started to go out of some markets in 2007, and in September 2008 came the financial market crash.

Across the country, home values fell 15% to 60%, peak to bottom, depending on the area and how badly it was affected by foreclosures — most of San Francisco got off comparatively lightly with declines in the 15% to 25% range. The least affluent areas got hammered hardest by distressed sales and price declines; the most affluent were typically least affected. Then the market stayed flat for about 4 years, albeit with a few short-term fluctuations. Supply and demand dynamics began to change in mid-2011, leading to the market recovery of 2012.

The Recovery since 2012 (Case-Shiller)

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This chart above looks specifically at home price appreciation since 2012 when the current market recovery began. Generally speaking, the spring selling seasons have seen the most dramatic surges in appreciation.

San Francisco Median Sales Price Appreciation

The charts below look at median sales price movements in San Francisco County itself over the shorter and longer terms. These do not correlate exactly with Case-Shiller – firstly because C-S tracks a “metro area” of 5 Bay Area counties, and secondly, because median sales prices are often affected by other factors besides changes in fair market value (such as significant changes in the distressed, luxury and new-construction market segments; in interest rates; seasonality; buyer profile; and so on).

The Current Recovery: 2012 – Present

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In 2011, San Francisco began to show signs of perking up. An improving economy, soaring rents, low interest rates and growing buyer demand coupled with a low inventory of listings began to put upward pressure on prices. In 2012, as in 1996, the market abruptly grew frenzied with competitive bidding. The city’s affluent neighborhoods led the recovery, and those considered particularly desirable by newly wealthy, high-tech workers showed the largest gains. However, virtually the entire city soon followed to experience similar rapid price appreciation.

San Francisco median home sales prices increased dramatically in 2012, 2013, 2014, and then again in the first half of 2015. In the second half of 2014, after the spring frenzy had cooled off, home prices flattened out. We will see if that happens in the second half of 2015 as well.

Longer-Term: 1993 – Present

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Comparing San Francisco, California & National Median Price Appreciation

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San Francisco has been dramatically out-performing the overall state and national markets.

Mortgage Interest Rates since 1981

It’s much harder to decipher any cycles in 30-year mortgage rates, but rates remain astonishingly low by any historical measure, and this, of course, plays a huge role in the ongoing cost of homeownership and the real estate market.

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Interest Rates: 1993 – 2015
This chart highlights the big changes in interest rates since 1993, right before market prices surged in the mid-nineties.

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More information regarding underlying demographic and economic conditions of the current real estate market can be found here: 10 Factors behind the SF Market

Housing Affordability Index (HAI) Cycles, 1991 – Present
It’s interesting to see the reverse correlation between the trend lines for housing affordability rates and those of real estate price cycles (above). HAI rates jump higher in market recessions, peaking at the bottom of the market, and then decline as the market recovers, bottoming out when peak prices are hit. The lowest Bay Area housing affordability housing index rates (probably in history) were hit in 2007 right before the 2008 market crash. The Bay Area is still above those lows in its current recovery. (My gratitude to J. Thomas Martin of the SF & East Bay Real Estate Networking Group for bringing his excellent analysis of affordability rates to my attention and allowing me to piggyback on it).

Housing affordability percentages typically and unsurprisingly run lower in affluent counties than in less expensive counties. In San Francisco, HAI is also affected by the very high percentage of residents living in rent-controlled housing, which disconnects, to a large degree, resident household income with market rate housing costs. Another issue in SF is that much of the market is being driven by new jobs and new wealth, which also skews the dynamic between existing household income and home prices.

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Housing Affordability Rate Calculation Methodology

Inflation & Interested Rate-Adjusted Housing Cost (since 1993)

The Home Cost Trends chart below reflects a very approximate calculation of monthly home payment costs (principal, interest, property tax and insurance) adjusted for inflation – i.e. in 1993 dollars – using annual median house sales prices, average annual 30-year interest rates, and assuming a 20% downpayment. The average annual compounding CPI inflation rate fluctuated, but averaged approximately 2.4% over the period, and average annual mortgage rates fluctuated from 8.4% to 3.7% (see mortgage interest rate charts earlier in this report), which, as mentioned before, had a huge impact on financing costs.

Adjusting for inflation and interest rate changes means that though the median sales price is now far above that of 2007, the monthly housing cost is still a little bit below then. This isn’t a perfect apples-to-apples comparison because it doesn’t take into account that the amount of the 20% downpayment increased significantly over the time period. Still, since ongoing cost is typically an important factor for homebuyers (at least those getting financing), this affords another angle on our market.

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Different Bay Area Market Segments:
Different Bubbles, Crashes & Recoveries

2000 to 2014

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The comparison composite chart above has not been updated since mid-2014, but it dramatically illustrates the radically different market movements of different Bay Area housing price segments since 2000. Farther below are updated individual price charts for each price segment.

Again, all numbers in the Case-Shiller chart relate to a January 2000 value of 100: A reading of 182 signifies a home value 82% above that of January 2000. These 3 charts illustrate how different market segments in the 5-county SF metro area had bubbles, crashes and now recoveries of enormously different magnitudes, mostly depending on the impact of subprime lending. The lower the price range, the bigger the bubble and crash. The upper third of sales by price range (far right chart) was affected least by the subprime fiasco and has now basically recovered peak values of 2006-2007. In the city itself, where many of our home sales would constitute an ultra-high price segment, if Case-Shiller broke it out, many of our neighborhoods have risen to new peak values. The lowest price segment (far left chart), more prevalent in other counties, may not recover peak values for years. If one disregarded the different bubbles and crashes, home price appreciation for all three segments since January 2000 is now (as of autumn 2014) almost exactly the same, in the range of 96 to 97%.

Updated Case-Shiller Price-Tier Charts

Low-Price Tier Homes: Under $561,000 as of 5/15

Huge subprime bubble (170% appreciation, 2000 – 2006) & huge crash
(60% decline, 2008 – 2011). Strong recovery but well below 2006-07 peak values.

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Mid-Price Tier Homes: $561,000 to $925,000 as of 5/15

Smaller bubble (119% appreciation, 2000 – 2006) and crash (42% decline)
than low-price tier. Strong recovery has put it back very close to its 2006 peak.

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High-Price Tier Homes: Over $925,000 as of 5/15

84% appreciation, 2000 – 2007, and 25% decline, peak to bottom.
Now climbing well above previous 2007 peak values.

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These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. All numbers are approximate and percentage changes will vary slightly depending on the exact begin and end dates used for recoveries, peak prices and bottom-of-market values.

Copyright 2015 Paragon Real Estate Group.