Demand for housing in San Francisco, despite high prices and economic effects of the pandemic, continues. (Kevin N. Hume/The Examiner, 2020)

Demand for housing in San Francisco, despite high prices and economic effects of the pandemic, continues. (Kevin N. Hume/The Examiner, 2020)

Talking about inventory in unprecedented times

Traditional market indicators may not always be what they seem

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Having spent the past 15 years immersed — some might say unhealthily — in San Francisco real estate, one conclusion I’ve drawn is that the most important factor in determining the state of the local market is inventory. Supply and demand. Inventory goes up, prices go down. All of the other stuff? Tertiary. Noise. Inventory goes down, prices go up.

For the past 15 years, save for a notable blip between 2008 and 2010, the available supply of homes for sale in San Francisco has hovered around historic levels of scarcity and then, amazingly, become even more scarce. Demand, though, has remained high.

Of course, this is a pretty simple, reductive way of looking at the market, but if you think about it, all the other factors — the tech bros, the earthquakes, and in the past year, the people fleeing The City for calmer climes — that’s the stuff that contributes to inventory fluctuations. It’s all about inventory.

Or is it?

I think it’s fair to say that since the pandemic began, industry experts and civilians alike have been looking for signs of what they felt an inevitable real estate market collapse. Surely in a world ruled by chaos and panic, a world in which potential homebuyers couldn’t even visit a listing in-person, people would simply hunker down and stop buying and selling houses for a while. Early prognosticators saw parallels between 2020 and 2008, when a lesser panic — this one financial — had would-be buyers huddling in corners, wallets clenched in both hands, instead of buying homes.

We know now that that something else happened. Inventory stayed scarce, as predicted, but buyers somehow became even more eager, especially in the Bay Area. Prices soared in San Francisco even as national media simultaneously ran daily stories about the demise of urban life. The buying frenzy seemed to exceed all frenzies that had come before, in part because we over estimated the paralyzing properties of COVID on real estate. People didn’t sit tight; they moved. Often they moved up.

And now, finally, as we edge toward what we hope isn’t a temporary normalcy, inventory has begun to rise. Surely this must mean prices are about to fall.

It’s tempting, for someone who likes staring at real estate numbers, to say that June’s 3.2 percent increase in available San Francisco inventory is an indicator of our return to normalcy, to trends that began in 2018 and 2019. This would point to a market softening, which is what almost everyone wants to hear, but I’m not so sure.

See, “supply” is only half of the most basic economic principle of “supply and demand.” There’s also demand; and even as local inventory rises, demand is rising faster.

According to the always reliable Patrick Carlisle, who’s been crunching local real estate numbers practically since Herb Caen was a boy and now does so for Compass, 60 percent of active listings received offers during Q2 of this year, the highest figure for any quarter dating back to 2016.

New listings are running higher than usual for this time of year (a not-to-be-sneezed-at 25 percent higher than in June 2019), but they were running about 50 percent above 2019 levels last fall and winter, and prices have not only not dropped, they’ve risen 15 percent.

Last winter, the San Francisco market had 11 months’ supply (MSI) of condominium and five months of single-family residence inventory (a measurement of how long it would take to sell the existing inventory of available properties). As of June, the MSI for condos was 3.5; for single family residences it was two, matching previous lows dating back to 2016.

The confounding part is that none of it should make sense. If you believe everything you’ve been reading nationally since last summer, demand should be falling — sharply — in San Francisco and soaring in Austin, Nashville and whatever yet-to-be-named small town in the Pacific Northwest hits the radar next.

And the latest story, of people leaving in 2020 (perhaps creating the weirdly brief collapse in the condo market?) then suddenly returning in 2021 (and maybe creating an unprecedented market for $3 million-plus listings?), doesn’t seem to add up. They left, sold their condos and are now returning and buying $3 million houses?

Last spring, more than one Realtor I know predicted a brief market uptick followed by a long, deep furrow, maybe lasting as long as five years. I’d hate to say that past year has proved them wrong, because what the past year has proven is that we’re swimming in uncharted waters where traditional market indicators may not always be what they seem. A 3.2 percent month-to- month increase in inventory might lead to a buyers’ market, but in unprecedented times like ours, you can’t be too sure.

Larry Rosen is a writer, editor, podcaster and recovering former Realtor. He is a guest columnist and his viewpoint is not necessarily that of the Examiner. The Market Musings real estate column appears every other week.

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