How Landlords Benefit Under the 2018 Tax Laws

I wrote an article last November about how the proposed tax bill could greatly benefit real estate investors. While a few things have changed between the initial bill and the approved bill, what hasn't changed is the fact that landlords can benefit greatly from the new tax changes. Let's take a look at what the official rules are for 2018:

1. New Pass-Through Tax Deduction (IRC Sec. 199A)

Although poorly written and overly complicated to calculate, this should undoubtedly be one of the biggest considerations for investors during their yearly tax planning. To oversimplify (for the sake of all non-CPA readers), residential landlords who own their properties through pass-through entities (or as sole-proprietors) are entitled to a new tax deduction that could be as much as 20% of your qualified net rental income. I would, however, like to make two quick notes regarding this deduction:

  • For those of you who 1) file single and have taxable pass-through income at/above $157,500 or 2) are married filing jointly and have taxable pass-through income at/above $315,000, you are subject to a phase-out of this deduction.
  • Again, this is extremely complicated to calculate. It's imperative that you work with a competent tax CPA to calculate your deduction, especially if your income falls into the phase-out limits listed above.

2. Expanded Section 179 Expensing

Like I had mentioned in my last article, the IRS is now allowing increased Section 179 expensing. In layman's terms, landlords are now allowed to immediately expense up to $1m of "personal property" used in their rental business. This specific tool for expensing has never been available to landlords until now. Landlords who are purchasing new appliances for vacated units or provide furnished rentals can annually expense their purchases up to $1m instead of having to depreciate those purchases over the years. So for anybody who's been waiting to rehab their units, 2018 is an excellent year to make upgrades. Please consult with a CPA about which purchases qualify for Section 179 Expensing.

3. Lower Individual Tax Rates

Along with additional tools to help lower your taxable income, the new tax laws also reduce individual tax rates. Since rental income is taxed at your individual rate, landlords get another break here. See below for the new rates for 2018:

2018 Tax Brackets.jpeg

There are other new tools for landlords that I didn't mention in this article such as Increased 100% Bonus Depreciation. For those of you who own rental property, it's important for you to get up-to-speed on how to take advantage of these new tax benefits before they're gone. If you have any questions regarding an overall tax strategy for your real estate investments, please give me a call or email! I'll be happy to help point you in the right direction. 

Disclaimer: Although I still maintain an active CPA license in the state of California, you SHOULD NOT rely upon the tax advice in this article until consulting with your own tax CPA. Everyone's situation is unique, so you must consult with a qualified tax practitioner to receive the right advice for you.


3 Reasons Why The New Tax Bill Would Benefit Real Estate Investors

A lot of Realtors are complaining about the recently released Tax Cuts & Jobs Act. In particular, agents are getting hung up on the proposed reduction in mortgage interest deduction. What they fail to see, however, is that this a small disadvantage in wake of other incredibly advantageous benefits for property owners. I will try to explain, in the simplest terms possible, the three reasons why this bill could be huge for real estate owners and investors.


1. The Reduction in the Allowed Mortgage Interest Deduction is Negligible

When you actually do the math, the net out-of-pocket difference for taxpayers is negligible. The reason why Realtors are complaining is that most of them don't understand how a deduction actually works. In simple terms, a deduction reduces "the number" (aka your taxable income) that is applied to your given tax schedule. What you actually pay is the product of "the number" and your tax bracket. A deduction IS NOT a dollar-for-dollar offset of the tax bill you pay to the IRS.

Let's do a quick scenario. You have $1m of mortgage debt at 3% interest, and you make $250k a year before your mortgage interest deduction. Based on the proposed new tax brackets (and assuming no other factors), this is how it would work out:

Tax Reform Breakdown v2.jpg

So in the end, your increase in taxes PAID would be $5,250. While $5,250 is nothing to joke about, keep in mind 3 things. 1) This is a worst case scenario for someone who has a full $1m in debt. For somebody who makes $250k a year and can afford a $1m mortgage, they will be fine. 2) Outside of the Bay Area, most Americans don't even have mortgages over $500k. So for nearly everybody else, this limitation would have no effect on them. 3) This scenario fails to include the two big tax incentives that will help real estate owners make MUCH more money than they would lose here.


2. 25% Maximum Tax Rate for Passthrough Entities

This is insane, because if this bill passes, it would make real estate far more profitable for investors. Investment properties are typically held in passthrough entities such as LLCs (if you aren't holding your investment property in a passthrough entity, you're making a huge mistake and we need to talk). Under current law, any income from passthrough entities are taxed at your ordinary individual rate. Given somebody in the 35% tax bracket with a rental property, their property would only need to make $52,500 or more to break even with the above scenario. For self employed individuals who make ALL their income through LLCs, they will benefit even more from this tax rate cap.


3. Immediate Expensing of Business Investments (Sec 179)

Typically, owners who make capital expenditures (aka upgrades) to their business and/or their rental properties can only deduct the first $500k. In the simplest terms, any expenses over $500k would need to be slowly deducted over the following years meaning that you have to wait before you can benefit from those expenses (we call this depreciation). Under the new rules, the yearly amount has been expanded to $20m. So for investors making soft story changes to their buildings, making ADU (accessory dwelling unit) additions, or starting development projects, this is a huge benefit for investors. Add this benefit in conjunction with the 25% tax rate cap for passthrough income... it's clear to see that this new bill provides exciting opportunities for real estate investors and entrepreneurs in America.

So in closing, the new tax laws only serve as a very slight disadvantage to a small population in the US. That same population also stands to benefit far more from the other tax cuts in the bill. If these changes pass into law, we could be entering a golden era for real estate investors in the country.

Questions? Comments? Concerns? See below for a direct link to the tax bill and a great synopsis of the bill from Business Insider. 

Disclaimer: Although I still maintain an active CPA license in the state of California, you SHOULD NOT rely upon the tax advice in this article until consulting with your own tax CPA. Everyone's situation is unique, so you must consult with a qualified tax practitioner to receive the right advice for you.


  • 2017 Tax Cuts & Jobs Act (LINK)
  • Business Insider (LINK)

2017 Q3 SF Multi-Family Market Report

We’re at an interesting intersection in the SF multi-family market. Similarly to the residential market, it’s red-hot due to lack of inventory, high demand, and strong appreciation.

Selling Price Unit Graph.jpg

Right now, the average for multi-family property is just above ~$529,000 per unit. Favorable interest rates for buyers and strong market rents continue to drive the apartment market appreciation. For sellers, this is one of the best possible times to sell in the history of San Francisco.

Occupancy Rates.jpg

As we all know, the tenants in any given building drive the property’s market value. Although there’s been a slight dip in average rents per unit for Q3, occupancy rates have risen since Q1. It’s definitely a softer rental market compared with 2015, but this data tells us that we’re recovering from 2016. It will be interesting to see where occupancy rates land at the end of the year.

Cap Rate Graph.jpg

With high prices per unit, average cap rates for multi-family buildings remain low at 3.9%. Rates have been fluctuating since the end of 2015, so it’s too early to say if there are any meaningful tends at the moment. 

Crazy Hot Market - Again

As Buyers Compete for an Inadequate Supply of Home Listings,
San Francisco Median House Sales Price Soars to $1,500,000 in May

June 2017 Report

Home price appreciation, overbidding asking prices, supply and demand
dynamics, the SF luxury home market & new housing construction


Three Views of SF Median Sales Price Appreciation

Monthly House & Condo Median Sales Prices since 2012

We are not that enthusiastic about using monthly median prices, because San Francisco does not have that many sales in any given month (400-550), divided among 4 property types in 70-odd neighborhoods with different values. Monthly data can also be affected by short-term events, such as bad weather, a spike in interest rates, a new-condo project closing many sales, or a sudden political or economic event. All those factors mean that monthly prices can fluctuate dramatically without great meaningfulness as to changes in fair market value.

However, that being said, the spring market 2017 definitely became feverish and in May, the SF median house sales price jumped to $1,500,000, its highest point ever, about $100,000 (7%) above its previous monthly peak. The SF median condo sales price also hit a new peak at $1,200,000, $20,000 (1.7%) above its previous high. Note that it is not unusual for median sales price to spike in spring and then decline thereafter as the market starts to cool for summer (i.e. spring median prices do not immediately become the new normal). Other counties around the Bay Area also hit new peak median house sales prices in either April or May: $1.49m in San Mateo, $1.35m in Marin, $1.28m in Diablo Valley/Lamorinda, and $875,000 in Alameda.

Year-over-Year 3-Month Median Sales Prices
March-May, since 2005

Comparing March through May sales year-over-year, houses and condos also hit new peaks: the SF median house price increased 4.6% from the same period in 2016, and the SF median condo price increased 4.5%.

Rolling 3-Month Median Sales Prices since 2005

In both this chart and the one above it, one sees the plateauing of condo median prices in 2015-2016. The condo market cooled much more than the house market in 2016, mostly due to an influx of new construction condos coming on market just as high-tech hiring slowed.


Comparing Us and Them

San Francisco & National Appreciation Trends since 1987
through March 2017

The numbers on the Case-Shiller chart below all relate to a home price of 100 in January 2000: 50 denotes a home price 50% below then; 230 signifies a price 130% above January 2000.

This chart compares the S&P Case-Shiller Home Price Indices for the 5-county San Francisco Metro Area high-price-tier market (which reflects the city of San Francisco best) in the blue line and the United States market in the green line. It goes through March 2017, which is the last report Case-Shiller has released as of early June, so it will not reflect the appreciation of April and May.

The appreciation trend lines are really quite similar except for 3 periods: Right after the 1989 earthquake, the rise and crash of the dotcom bubble, and the recent high-tech boom in the Bay Area. Looking beyond the difference in appreciation rates since 2012, 70% vs. 40%, the difference in dollar appreciation in median house prices over the 5 years is enormous: over $500,000 for SF vs. $70,000 for the U.S.

Note on the chart that after a divergence, it is not unusual for the trend lines to converge once again.


Market Heat by San Francisco District

Overbidding House List Prices

The house market is hotter than the condo market, and the more affordable house market (affordable by San Francisco standards) has turned into a feeding frenzy this spring. By the measure of overbidding, the Sunset, Parkside and Golden Gate Heights district remains the hottest the city, as it was when we last measured in October 2016. These are stupendous median percentages over house asking prices. In the condo, co-op and TIC market, overbidding is at lower percentages, generally running in the 5-11% range, but going as low as 0% in the South Beach/SoMa district with its big influx of new construction inventory.


4 Measures of Supply & Demand Dynamics
January 2007 - May 2017

In each of the following charts, there are distinct changes reflecting 1) the market recession after the 2007 peak, 2) the 2012-2015 recovery, 3) some cooling in the market in 2016, and 4) the market heating up again in spring 2017. Note the differences in some of the trends lines between the house and condo market. San Francisco is the only county in the Bay Area where the market is dominated by condo listings: Thousands of new condos have been built since 2000 with many more in planning.

New Listings: The decline in the frequency of owners putting their homes on the market has played a critical role in pressurizing the markets in SF and, indeed, around the country.

Active Listings: The number of active listings on the market at any given time is determined by the number of sellers putting their homes on the market and the intensity of buyer demand jumping on those new listings (and taking them off the market).

Months Supply of Inventory (MSI) measures the interplay of supply and demand: The lower the MSI, the stronger the buyer demand as compared to the supply of listings available to purchase.

Average Days on Market: When demand increases, especially against a declining inventory, competitiveness between buyers increases and, typically, average days on market decline.


San Francisco Luxury Home Market

Here are 7 charts from the more than 20 new analyses we have posted to our luxury report, which can be found in its entirety here: San Francisco Luxury Home Market

The luxury home market in the city has mostly bounced back from the cooling it experienced late-2015 through 2016, but, generally speaking, is still not quite as strong as it was in spring 2015. The first chart below breaks out luxury home sales by dollar per square foot values. The 3 MLS sales for over $3000 per square foot in the past year were all in the new Pacific Heights luxury condo project, The Pacific.

San Francisco Luxury House Sales

House sales of $3m+ are concentrated mostly in 2 districts: The $3m to $5m market is dominated by the greater Noe, Eureka & Cole Valleys district; the $5m+ market is dominated by the Pacific & Presidio Heights, Cow Hollow and Marina district. On a dollar per square foot basis, the best values are in the St. Francis Wood/Forest Hill area, an area of large, gracious houses on larger than usual lots.

The majority of luxury houses in San Francisco were built
before 1920; the great majority before 1940.

San Francisco Luxury Condo, Co-op & TIC Sales

May 2017 saw the second highest monthly number of luxury condo sales ever, just below the number of sales in March 2015.

The biggest change in the luxury home market has been the dramatic drop, almost 50% year over year, in luxury condo sales reported to MLS in the greater South Beach/ SoMa/ Yerba Buena district, even as listing inventory there has hit new highs. This is the area where large, very expensive, high-rise projects continue to come on market, and, to some degree, they may be cannibalizing MLS sales in the resale market. Foreign buyers have played a significant role here in recent years and it is possible (we do not have hard data) that this demand has declined due to political issues here and in China. This is also where the unfortunate issues at the Millennium Tower (slight sinking and tilting; multiple lawsuits) are being extensively reported upon. Even though the construction issues at the Millennium are unique to itself, it may be that the storm of negative publicity is making affluent buyers more cautious about buying in the surrounding area. If so, that effect will presumably wear off in time, which may make this a good time to buy while inventory is high.

For the time being, the luxury condo market has shifted its center back to older, northern, highly affluent neighborhoods like Pacific Heights and Russian Hill.


New Housing Construction and the San Francisco Business Times performed excellent analyses recently of the state and pipeline of new housing construction in San Francisco, which we have illustrated in the two charts below. (Unfortunately, the annual Planning Department Housing Inventory Report, which usually comes out in May or June, has been delayed, probably until August or later.)

All our Bay Area real estate analyses can be found here: Paragon Market Reports


It is impossible to know how median and average value statistics apply to any particular home without a specific, tailored, comparative market analysis. In real estate, the devil is always in the details.

These analyses were made in good faith with data from sources deemed reliable, but may contain errors and are subject to revision. It is not our intent to convince you of a particular position, but to attempt to provide straightforward data and analysis, so you can make your own informed decisions. Median and average statistics are enormous generalities: There are hundreds of different markets in San Francisco and the Bay Area, each with its own unique dynamics. Median prices and average dollar per square foot values can be and often are affected by other factors besides changes in fair market value. Longer term trends are much more meaningful than short-term.

© 2017 Paragon Real Estate Group

Preliminary Indications of Market Direction

April 2017 Report

In recent months, there have been multiple reports in local media about Big Drops in San Francisco Home Prices! But, umm, we are not seeing it, neither on the ground in the hurly burly of buyers and sellers making deals, nor in the year-over-year quarterly statistics of supply and demand. News articles often make a big deal regarding the median sales price in a single month, but monthly data is often gravely deficient as an indicator, fluctuating up and down without much meaningfulness due to a number of factors. January and February are particularly bad months to draw conclusions from: The lowest sales volumes of the year, reflecting deals negotiated during the December-January market doldrums, with weather issues sometimes thrown in besides (for instance, in early 2017). Last but not least, the media often mixes property types to come up with a single median sales price, and that is generally not a good idea either.

This chart above illustrates San Francisco quarterly median sales price movements since 2012, which, as one can see, is also prone to significant fluctuation. In Q1 2017, the median house price basically plateaued year over year, while the median condo price actually increased from Q1 2016. (Historically, it is not unusual for Q1 median prices to drop from Q4 due to seasonal reasons, mainly the characteristic big slowdown of luxury home sales in mid-winter.) Q1 is the quarter of the year with the least number of closed sales, so too much should not be made of its data, but we have summarized annual Q1 dynamics for the past 4 years in the 2 charts below. For context, remember that 2014 and 2015 were particularly feverish markets. A much better assessment of the direction of the 2017 market will be possible after Q2 data is in: March through June is usually the most active selling season of the year.

Year-over-Year Comparisons of Q1 Statistics

Chart 1: San Francisco House Market Overview

Chart 2: San Francisco Condo Market Overview


Annual Median House Sales Price Trends:
5 Selected San Francisco Neighborhoods, since 2004

Generally speaking, in higher priced areas, median house prices have been plateauing or dropping a little, while the more affordable neighborhoods have continued to appreciate: This is a relatively common dynamic around the Bay Area.

The only way to assess value or appreciation for a particular home is by performing a comparative market analysis tailored to its specific location, condition and circumstances. Of all the neighborhoods graphed above, the Marina has by far the fewest house sales and the widest range of individual home sales prices, so it is most susceptible to median price fluctuations caused by other factors besides changes in value - for example, a substantial change in the listings available to purchase in a given year. We do not believe that the same Marina house selling in 2015 would have sold for 15% less in 2016: something less, perhaps; 15% less, very unlikely. This is a good illustration of the dangers of making too much of median sales price changes.

If you would like median home price trends for another San Francisco neighborhood, please let us know.


Average Sales Price to Original List Price Percentage

By Month: House, Condo, Co-op, TIC & 2-4 Unit Building Sales

As seen in this chart, overbidding typically heats up as the market moves into spring. So far, this year has been no exception, though the overbidding percentages are somewhat lower than in recent years.


Annual Market Trends

For clarity and meaningfulness, we much prefer annual trend analyses, with their much bigger data sets, and have recently completed a comprehensive review of virtually every statistic we could think of on that basis. Doing so allows us to stand back to see the broader view of what is happening in the market, instead of getting obsessed by what happens to be in front of our shoe. Looking at annual trends, virtually all the market statistics illustrate the same general conclusion: The market became progressively stronger coming out of the 2009-2011 housing recession; the frenzy peaked in 2015; and the market cooled a bit in 2016, condos more so than houses. This is a generalization of the macro-trend: Different market segments have been going in somewhat different directions and speeds in the city and around the Bay Area in the past year or so.

Below are a few of the many analyses. The full review is here: Long-Term Annual Trends in San Francisco Real Estate

First 2 charts: The hotter the market, the greater the percentage of listings that sell quickly, and the more ferocious the competitive bidding on those listings.

Even with some cooling, the overbidding on appealing new listings has remained quite dramatic: Our current percentages over asking would stun anyone from almost any other market in the country. (However, underpricing has also become a more common strategy here than in other markets.)

Annual Trends Chart 3: As a market begins to cool, the number of listings that expire or are withdrawn without selling increases. This is typically due to increasing supply, softening demand, sellers looking for more money than buyers are willing to pay, or all three.

Annual Trends Charts 4 & 5: As new condos and new rental apartments came on the market in greater numbers in the past year, it cooled those two market segments, much more so than the house segment, of which hardly any are built new in the city anymore. (The more affordable house market in the city has remained remarkably hot.) The rental market was affected most as more new rental units came on market than at any time since WWII: Though SF still has the highest rents in the country, they have dropped from their peak in 2015.

Chart 6: To a large degree due to big changes in tenant eviction and condo conversion laws, the TIC market has gone through a large decline in sales volume. It is also true that after decades of turning multi-unit buildings into condos and TICs, the supply of such properties available to do so has declined. Generally speaking, TIC median sales prices plateaued from 2015 to 2016 at about 14% below the median condo price.


San Francisco Luxury Home Market

Three sample charts from our big report on the high-priced home segment. Generally speaking, the luxury market has cooled more than the more affordable segments, and the luxury condo market has cooled more than the luxury house market. This is mostly due to the recent surge of new-construction luxury condos onto the market in the city.

The first two charts below are snapshots of either the house or condo segment of the luxury market in two of our major districts.

This next chart illustrates one of the bigger changes in SF high-end home markets. Many more listings, resale luxury condos in particular, are expiring or being withdrawn from the market without selling.

Our full report is here: Luxury Home Market of San Francisco


Interest Rates

Constantly shifting economic and political factors continue to affect rates: Mortgage interest rates are significantly up since the election, fluctuating up and down since the year began, but still far below historical norms. This is a factor everyone is watching carefully because of its potential impact on affordability, already a big issue in the Bay Area.

Apartment Building (Multi-Unit Residential) Sales

We have also released our quarterly report on the multi-unit residential property markets of San Francisco, Marin and Alameda Counties: Bay Area Apartment Building Market. Below is one of its many analyses.


All our reports can be found on our redesigned website: Paragon Market Reports

Using, Understanding and Evaluating Real Estate Statistics

If you will forgive a little celebrating on our part: In the last two quarters, Paragon sold more San Francisco residential and multi-unit residential real estate than any other brokerage (as reported to MLS, per Broker Metrics), even though we have far fewer agents than many of our competitors.

If you have any questions or comments regarding this report, or if assistance can be provided in any other way, please call or email.


It is impossible to know how median and average value statistics apply to any particular home without a specific comparative market analysis, which we are happy to provide upon request.

These analyses were made in good faith with data from sources deemed reliable, but may contain errors and are subject to revision. It is not our intent to convince you of a particular position, but to attempt to provide straightforward data and analysis, so you can make your own informed decisions. Median and average statistics are enormous generalities: There are hundreds of different markets in San Francisco and the Bay Area, each with its own unique dynamics. Median prices and average dollar per square foot values can be and often are affected by other factors besides changes in fair market value. Longer term trends are much more meaningful than short-term.

© 2017 Paragon Real Estate Group

What Costs How Much Where in San Francisco

Below are 3 charts from our updated 9-chart report that breaks down which neighborhoods one is most likely to find a home within a specific price range, whether house or condo. The report covers homes from under $1 million to over $5 million.

If you want to buy a house under a million dollars, one is now mostly limited to the neighborhoods that run across the southern border of San Francisco.

The full report is here: San Francisco Neighborhood Affordability

What Can I Buy for $1,200,000 or $2,000,000?

Below are illustrations of the wide range of homes (and, to some degree, lifestyles) one might buy at two different price points in the city. The higher a home is located on the vertical axis of the charts, the greater its square footage. (Note that the bathroom specifications can be a little screwy, for example 1.3 or 1.7 baths, because these are averages of homes sold at these approximate price points.)

$1,200,000 is approximately the median home price in San Francisco if one combines both houses and condos. For that price, one could buy a 4-bedroom, 2135 square foot house in Ingleside or Oceanview, or a 3-bedroom, 1566 square foot house in Outer Parkside, or a 2-bedroom, 1070 square foot condo in Pacific Heights.

For $2 million, one could purchase a gracious 4-bedroom, 2650 square foot, detached house on a large lot in Forest Hill, or a classic 2-level, 3-bedroom, 1900 square foot condo with a garden in the Marina, or a 2-bedroom, 1350 square foot, luxury high-rise condo with spectacular views in South Beach.


Quick Market Update

December through February constitute the slowest sales months of the year and are subject to significant seasonal issues, so coming to definitive conclusions about where the market is heading based on their data is difficult. However, for what it is worth, comparing the 3-month period to the same period a year ago, the median house sales price at $1,290,000 is up 4.5% and the median condo sales price at $1,050,000 is down 4.1%. As mentioned in earlier reports, the big dynamic affecting the condo market has been the surge of new-construction inventory hitting the market in the past year, just as demand started to soften. The inventory of new condos for sale is now at its highest level in 7 years, and, not surprisingly, this is impacting the supply and demand dynamic for condos, especially in those districts where new construction is concentrated. On the other hand, the inventory of house listings continues to remain at record lows, keeping that market, especially its more affordable segments, quite competitive.

This chart below reflects the latest Case-Shiller Home Price Index for the 5-county metro area house market, going through the end of 2016. It illustrates how in 2016, more affordably-priced houses continued to appreciate significantly, while the most expensive segment basically plateaued. Generally speaking, this is a common dynamic around the Bay Area.

San Francisco Median Home Price Trends since 1994
For a longer-term perspective

New Listings Begin Pouring onto the Market Again

The period from March through May is usually the most active selling season of the year, and we will soon have more conclusive indications of where the 2017 market is headed. This next chart illustrates the typical, dramatic surge of new inventory that fuels sales during this season.


San Francisco Home Sales with Views

SF is a city known for its wide variety of gorgeous views, which can add substantially to the value of a home so graced. Of all the house sales in 2016, only 88 reported having a Golden Gate Bridge view, and some of those were peek-a-boo views (i.e. if you lean out the bathroom window on the top floor) or roof deck views. A full-on, panoramic view of the GG Bridge from Pacific Heights adds over $1 million to the median house price there. Unsurprisingly, condos have the most, and most spectacular, views due to high-rise condo projects.

San Francisco Home Sales by Bedroom Count


Renting vs. Buying in San Francisco

Comparing the purchase, with 20% down, of a 2-bedroom/2-bath condo
with the rental of a comparable apartment in San Francisco

Every year or so, we like to update this analysis using current median sales prices and average rents for comparable 2-bedroom condos and apartments. Rent vs. buy calculations can be performed a wide variety of ways, and results will depend on your own financial circumstances and economic projections, which you should review with your accountant. There is a versatile calculator published by The New York Times, where one can play with all the financial factors involved: NYT Rent vs. Buy Calculator. Our analysis represents simply one scenario, which is meant to be more of an invitation to perform your own calculations than a definitive conclusion on the subject.

Depending on your circumstances, plans and predictions for the future, renting may well be the best choice for you. However, low interest rates, high rents, loan principal pay-down over time, inflation and appreciation rates, and the large tax benefits that accrue to homeownership typically give a large long-term financial advantage to buying, if you have the funds for the cash down-payment. (Of course, as with any investment, financial results will ultimately depend on your purchase and sale dates.) This next chart compares net monthly housing costs between renting and buying after tax deductions and principal repayment are accounted for. Our full report goes into much greater detail, such as the accumulation of wealth, in the form of home equity, over time. Please contact me if you would like a copy.


Other recent Paragon reports you might find interesting:

Comprehensive Survey of the 2016 Market in San Francisco

San Francisco Luxury Homes Market Report

A Survey of Real Estate Markets around the Bay Area

Bay Area & San Francisco Home Price Maps

Ups & Downs in Bay Area Markets

Home Values, Appreciation Trends, Market Conditions, Rents,
Affordability, and Selected Demographic Angles, by County

February 2017 Survey

We have updated our median home price maps for the entire Bay Area by city, for San Francisco by neighborhood, and then specifically for the Marin, Lamorinda & Diablo Valley, and Wine Country markets. To access them, click on the map image below.

These 2 charts below are specific to the San Francisco house and condo market, illustrating median price movements since 1994. All parts of the Bay Area saw similar trends, though the percentages up and down varied significantly between markets.

A few interesting points regarding the above graphs: The year of highest percentage appreciation in the past 25 years was 2000, the height of the dotcom bubble. (However, by dollar appreciation, as opposed to percentage change, recent years have seen by far the greatest increase in prices.) When the dotcom bubble popped, SF condo prices were much more negatively affected than house prices: Young, high-tech workers play a bigger role in the condo market. And in 2016, the condo median sales price plateaued (and declined a little in some neighborhoods) while houses continued to appreciate, albeit at a much slower rate than the previous 4 years. We ascribe this plateauing in condo appreciation to, firstly, a big increase in new condo construction (more supply) and, secondly, to some cooling of the high-tech hiring boom (somewhat less demand).


Bay Area Median Price Changes

From Top of Bubble to Crash & Recovery

These next two charts illustrate BAY AREA median house prices and price trends since the market peaked in each county prior to the 2008 crash, to the bottom of the market during the 2009-2011 recession, to 2016, after 5 years of recovery. We also threw in a separate section for San Francisco condos, since they are such a large part of the city market.

Based on the charts above, this next table is a bit complicated, but for those interested, it lays out the different percentage ups and downs from pre-crash peak, to post-crash bottom, and then back up to the present. It also breaks out the recent appreciation rate from 2015 to 2016.

If all these percentages up and down are too mind boggling, jump to the charts further below in the report, with additional county market comparisons and some interesting angles on demographics.

All Bay Area markets saw large surges in home values from 2000 to 2005-2007 (illustrated in the Case-Shiller chart further below); all went through significant or even terrible declines after the 2008 financial markets crash, typically hitting bottom in 2009-2011; and all have made dramatic recoveries since. But there are big differences in how these events played out in distinct markets, with 4 main factors behind price changes over the past 16 years:

  • BUBBLE: Generally speaking, the lower price ranges and the less affluent areas saw much bigger, crazier bubbles than other segments, inflated in the years prior to 2006 by predatory lending, subprime loans and the utter abandonment of underwriting standards.

  • CRASH: In 2008-2011 distressed-property sales devastated the lower price segments and the areas where they predominated, and they suffered the biggest declines in home prices. When the recovery started in 2012, they began from unnaturally low points, which had little to do with fair market values. Other market segments were certainly dramatically affected as well, but to much lesser degrees.

  • PROXIMITY to the high-tech boom: SF and Silicon Valley have been the white-hot hearts of economic expansion. Oakland and the rest of Alameda County were the closest, significantly-more-affordable housing options. Then, as one moves further away, the effect on home prices gradually lessened.

  • AFFORDABILITY: The more affluent areas led the recovery in 2012-2014, but then the highest pressure of demand started shifting to less expensive neighborhoods, cities and counties. Amid the feverish appreciation in prices, buyers desperately searched for affordable housing options. Now, some of the most expensive markets are beginning to cool, while less expensive ones remain very competitive.

  • OAKLAND had a gigantic subprime bubble, a huge 60% crash, and then a sensational recovery highly pressurized by being just across the bridge from SF (and much more affordable). The Oakland median house price is up a staggering 182% since 2011, partly because it crashed so low. However, because its subprime bubble was so big, it is only 12% above its inflated 2007 price. Alameda County as a whole has experienced much the same market. Other comparatively lower-priced Bay Area markets, such as northern Contra Costa, Solano, Napa and Sonoma, more distant from the high-tech boom, saw similar dynamics, but are still somewhat below their 2007 peaks despite substantial recoveries.

    SAN FRANCISCO, more expensive and affluent, had a much smaller bubble and much smaller crash with far fewer distressed property sales. The high-tech boom then supercharged its recovery: Its median house price is up 90% from the bottom hit in 2011 (much less than Oakland), but is 48% higher than its 2007 peak, the biggest increase over the 10 years of any of the markets measured. Silicon Valley has similar statistics, and other high-price markets like Marin and the Lamorinda/Diablo Valley area of Contra Costa County, saw comparable, if somewhat less dramatic, dynamics.


    Additional Bay Area Market Comparisons


    Bay Area Housing Affordability Index

    The Bay Area is among the least affordable places in the country,
    but it is still somewhat more affordable than during the historic low in 2007.
    Interest rates play a big role in that comparison.

    Interest rates changes, which have a large impact on affordability,
    continue to confound predictions as to sustained direction.

    Our Complete Bay Area Housing Affordability Report


    Selected Demographic Snapshots

    A few angles on how the Bay Area is different from other places, and how Bay Area counties differ from one another.

    Some local context to the current political issue of immigration.
    The Bay Area would be a totally different place without it.

    All Bay Area counties have been rapidly growing in population. San Francisco
    in particular is very densely populated and getting more so.

    Along with Washington DC and Seattle, the Bay Area ranks among
    the best educated metro areas in the country.


    Case-Shiller Home-Price Index Trends
    By Price Segment, since 1988

    This chart above based on the S&P Case-Shiller Home Price Index illustrates the enormous differences between the bubbles and crashes of different price segments in the Bay Area market (as alluded to earlier in this report): Notice the insane size of the bubble for the low-price tier (the light blue line) - it went up 174% from 2000 to 2006, about twice as much as the high-price tier (green line) - which then led to its staggering crash. It is interesting to note that the overall appreciation of all three price segments are now relatively similar when compared to 2000, with the low-price tier taking a small recent lead.

    Note: Case-Shiller analyzes the Bay Area market by low, mid and high-price tiers, each tier equaling one third of sales. For any Bay Area home, whatever its price in January 2000, Case-Shiller assigns it a value of 100. All other values on the chart below refer to percentages above or below the January 2000 price, i.e. 150 equals 50% price appreciation since that date. Case-Shiller does not use median sales price data, but instead uses its own proprietary algorithm to reach its conclusions.


    Bay Area Rents

    Some rents have begun to drop in the Bay Area, especially in San Francisco
    due to the current boom in apartment building construction.
    However, the city still has the highest rents in the land.

    Other recent or recently updated reports:

    San Francisco Luxury Home Market

    San Francisco Apartment Building Market

    San Francisco Real Estate Market in 2016


    These analyses were made in good faith with data from sources deemed reliable, but may contain errors and are subject to revision. It is not our intent to convince you of a particular position, but to attempt to provide straightforward data and analysis, so you can make your own informed decisions. Median and average statistics are enormous generalities: There are hundreds of different markets in the Bay Area, each with its own unique dynamics. Median prices can be and often are affected by other factors besides changes in fair market value, and longer term trends are much more meaningful than short-term. It is impossible to know how median prices apply to any particular home without a specific comparative market analysis.

    © 2017 Paragon Real Estate Group

    Gold, Google, Facebook & San Francisco Homes Return on Investment Rates since 2011

    January 2017 Report
    including over 20 custom charts


    This first chart is a somewhat lighthearted, but we believe accurate look at how various 2011 investments would have played out through 2016. (FB is dated from its 2012 IPO.) When calculating appreciation, purchase and sale dates are critical factors, and changing those can alter the results significantly: Using 2011, the last bottom of the real estate market, as the purchase date certainly plays to the advantage of home price increases. If you bought gold or soybeans in 2011, you really should have sold them a couple years ago at the height of the commodity price boom.

    Besides the appreciation percentage noted, buying a home in 2011 with all cash would have generated large, additional financial returns in the form of extremely low monthly housing costs. Buying it with 20% down supercharges the return on cash investment, and that is before adding in other advantages: Even with an 80% loan, by 2016 your monthly housing costs, with recent low interest rates and tax advantages, would be well below market rents. Then there is the huge capital gains exclusion on the sale of a primary residence, which would not apply to other investments.


    Sales of Probates, Penthouses, Fixer-Uppers, Lofts;
    Homes with Views, Elevators & Wine Cellars


    Long-term San Francisco
    Median Home Price Appreciation

    San Francisco median house prices continued to appreciate in 2016, albeit, at 6%, at a considerably slower rate than the previous 4 years, while condo prices basically plateaued (and indeed dipped in some neighborhoods). As with almost everything to do with real estate values, it boils down mostly to supply and demand, as discussed below.

    In 2016, the supply (and sales) of house listings in the city continued to dwindle, while a surge of new-construction condo projects hitting the market appreciably increased the inventory of condos available to purchase. In 2003, house sales in San Francisco were over 50% higher than in 2016. According to a study by the National Association of Realtors, the median time house owners are staying in their homes has jumped from an average of 6 years in 1987-2008 to 9 years since: Owners are getting older, not changing jobs as often, and baby boomers are aging in place as NAR put it. House owners sell their homes much less frequently than condo owners, who tend to be younger. In SF, there is also the factor of a reluctance to sell when that means facing a very challenging market for buyers. And with very low interest rates, and very high rents, some owners are renting out their houses instead of selling.

    It all boils down to a continuing strong demand for houses meeting a steadily declining supply: Even with a market that cooled somewhat in 2016, competition between buyers continues to push house prices up, especially in more affordable neighborhoods. The equation is different for condos, which has become the dominant property-sales type in the city: A cooling market is meeting increased supply. There has been no crash in condo prices, but areas with the greatest quantity of new condo construction have seen small declines.


    What Costs How Much Where in San Francisco

    Below are a few of our many updated analyses on home sales and prices by neighborhood, property type and bedroom count.

    House Sales & Values

    As can be seen above, two of the most affordable districts for houses, Districts 10 and 2, also provide 37% of all the house sales in the city. Generally speaking, they have continued to experience very strong buyer demand in 2016.

    Condo Sales & Values

    District 9, a large district that stretches from SoMa, South Beach and Mission Bay to Potrero Hill, Dogpatch and Inner Mission, is increasingly dominating condo sales in the city. The great majority of new condo construction, especially of the largest projects, has been occurring in this district.

    All our breakdowns by neighborhood and home size are here: SF Home Price Tables


    Home Sales by Price Segment by District

    Behind the overall median prices often quoted is a wide range of individual sales across a spectrum of prices. Here are a few of our updated analyses for every district of the city.

    Our complete collection of district analyses: SF District & Neighborhood Sales Breakdowns


    San Francisco Overview Market Statistics

    The following classic measures of market heat all tell the same story: Coming out of the recession in 2011, the San Francisco market became increasingly frenzied through the spring of 2015. In late 2015, as housing affordability became a critical issue, and the local high-tech economy saw some cooling, and financial markets worldwide experienced increasing volatility, the SF real estate market began to cool and normalize. Buyer competition for new listings softened, overbidding declined, days-on-market increased, appreciation declined or plateaued, and so on. And the condo market cooled more than the house market due to issues discussed above.

    2016 saw a reasonable adjustment to a desperately overheated market, but nothing that suggests, so far, an imminent, dramatic downturn. Indeed, by national standards, most of our current statistics still define a relatively robust market. In a recent interview, Ted Egan, chief economist of the City of San Francisco, put the odds of a new recession at 10% or less.


    Real Estate Market Seasonality

    Listing and sales activity builds from early January, the nadir of the market, into spring, typically the most active season. Accepted-offer activity provides an excellent illustration of the heat of the market during different times of the year.


    3 Important Economic Indicators

    San Francisco & Bay Area Employment Trends

    After dropping a little in the first half of 2016, SF and Bay Area employment numbers jumped back up in the second half, an encouraging sign for the local economy.

    Mortgage Interest Rates in 2016

    Interest rates popped 22% higher since the election, though they still remain very low by any historical measure. Where they will go now is a subject of intense speculation since they are a critical component of housing affordability.

    The S&P 500 Stock Index since 1994

    To the surprise of many, U.S. stock markets also popped after the election to their highest points ever.


    And now on to 2017, certain to be another interesting year.

    Wishing you and yours a safe, healthy, happy and prosperous New Year.


    It is impossible to know how median and average value statistics apply to any particular home without a specific comparative market analysis, which we are happy to provide upon request. Please call or email if you have any questions or need assistance in any way.

    These analyses were made in good faith with data from sources deemed reliable, but may contain errors and are subject to revision. It is not our intent to convince you of a particular position, but to attempt to provide straightforward data and analysis, so you can make your own informed decisions. Median and average statistics are enormous generalities: There are hundreds of different markets in the Bay Area, each with its own unique dynamics. Median prices and average dollar per square foot values can be and often are affected by other factors besides changes in fair market value. Longer term trends are much more meaningful than short-term.

    © 2017 Paragon Real Estate Group

    Real Estate Cycles, Interest Rates & Neighborhood Appreciation Trends

    December 2016 San Francisco Real Estate Market Report

    We will begin compiling our 2016 market review report soon, but in the meantime here are a few snapshots on appreciation trends in home prices and average dollar per square foot values, and of what is happening with mortgage interest rates.


    Bay Area Real Estate Cycles
    since 1984

    The first chart below is a simplified graph based on the S&P Case-Shiller Home Price Index illustrating percentage increases and decreases in prices for houses in the higher-price tier. The markets in San Francisco, Marin, San Mateo and Lamorinda/Diablo Valley are generally dominated by high-price tier home sales. (If you wish our chart of market cycles for low-price or mid-price homes, please let us know.)

    All the short-term fluctuations up and down have been removed so that the chart only reflects major turning points in the market. This chart is a general overview for 5 Bay Area counties, and there have been significant variations between market trends in different neighborhoods, cities and counties.

    San Francisco Median Sales Price Trends
    since 1994

    Year-over-year median sales prices for SF condos and TICs have plateaued in 2016, while median house prices have continued to appreciate, albeit at an appreciably slower rate than the previous 4 years.

    Note that the Case-Shiller Index does not measure home price appreciation by changes in median sales price (as in the second chart above), but uses its own special algorithm, which it believes adjusts for factors that often affect overall median sales prices, but are not related to changes in fair market value of specific properties.

    Our complete report on cycles is here: 30+ Years of SF Bay Area Real Estate Cycles. This is by far the most widely read report on our website.


    Short & Long-Term Mortgage Interest Rate Trends

    Interest rate movements are much in the news since the election, and below are 2 charts illustrating short-term and long-term trends. Interest rates can be very volatile and affected by a wide range of economic and political factors: Rate changes are famously difficult to predict. Most experts believe the Federal Reserve Bank will raise its benchmark rate, for the first time in 12 months, later this month. Needless to say, mortgage interest rates play a large role in ongoing housing costs, except for buyers paying all cash.

    Our post-election report is here: Interest Rates & Housing Affordability


    Average Dollar per Square Foot Trends by District

    San Francisco HOUSE Sales, 2011-2016 YTD

    Realtors divide the city into 10 different districts. For example, Pacific & Presidio Heights, Cow Hollow and the Marina constitute District 7. The central cluster of neighborhoods surrounding Noe, Eureka and Cole Valleys make up District 5. The broad area running south of Market all the way to Inner Mission and Bernal Heights is District 9, and so on. Some districts contain neighborhoods of relatively similar values, such as D5 and D7, and others contain neighborhoods of significantly varying values: For example, D8 includes both Russian Hill and the Tenderloin. In any case, using districts allows us to look at what is broadly going on in the city without breaking out the 70-odd individual neighborhoods. (If you would like data specific to a single neighborhood, please call or email.)

    A San Francisco neighborhood and district map is included at the bottom of this report.

    Like all value statistics, average dollar per square foot is not a perfect indicator of changes in home values. It can be affected by a variety of factors to create anomalous fluctuations; square footage can be measured different ways; and a fair percentage of home sales do not publish square footage at all, so that the calculations can only be made on those that do.

    Very generally speaking, the more affordable house districts in the city (and around the Bay Area) have continued to see significant appreciation in average dollar per square foot values in 2016, while the more expensive neighborhoods have plateaued or even ticked down a little. However, one should not make too much of small percentage changes up or down over the shorter term. Sometimes, one has to allow a trend to develop instead of jumping to dramatic conclusions about where the market is headed based on limited data. 2016 YTD statistics may well change when the last 3 weeks of the year are included in the analysis.


    Average Dollar per Square Foot Trends by Realtor District

    San Francisco CONDO Sales, 2011-2016 YTD

    The condo market has generally softened more than the house market and most of the district condo markets have plateaued in average dollar per square foot values or dropped a little. Much of this has to do with both a cooling in the high-tech boom (lessening demand) and a surge of new-condo projects coming on market (increasing supply). The district with the most significant decline, 5%, has been District 9, a large district encompassing SoMa, South Beach, Mission Bay, Potrero Hill, Dogpatch and Inner Mission: A large majority of SF new-condo construction is occurring in this area, and thus more definitively shifting the supply and demand dynamic.

    On these charts, the only district showing a significant increase was District 2, Sunset-Parkside, but there are really too few condo sales in D2 for the data to be statistically reliable. District 7, Pacific Heights-Marina, saw a small percentage increase, but its 2016 average dollar per square foot value was affected by a sizable number of sales of newly-built, ultra-luxury condos, with very high values. If those sales were deleted, D7 would also have seen a small decline.

    None of the declines in either house or condo dollar per square foot values yet suggest anything approaching a market crash. So far the changes appear to be moderate adjustments to shifts in the local economy, increasing new construction, and/or affordability issues at the higher end of the market.


    Median House Price Trends by Neighborhood

    Substantial median house price appreciation has continued in more affordable San Francisco neighborhoods, as illustrated in the first chart below

    Looking at the next chart for median house price changes in higher-price neighborhoods, some important caveats apply: First of all, some of these neighborhoods, such as St. Francis Wood, Cole Valley or Inner Richmond, do not see many house sales in any given year. This makes price fluctuations more common without necessarily relating to changes in fair market value. (Do we believe that Inner Richmond houses suddenly appreciated 20% in 2016? No.) In Pacific Heights, the issue is both not that many sales and that the range of MLS sales prices is so huge, from $2,000,000 to $22,000,000 in 2016. This can cause median prices to jump up or down without great meaningfulness: Sometimes, just one or two additional sales can make the median price in a given period change dramatically.

    Statistically speaking, the most reliable data in the chart below is for Noe & Eureka Valleys, which have a high number of sales: The median sales price there has basically plateaued from 2015 to 2016.


    San Francisco Neighborhood Map
    with Realtor Districts Delineated

    All our reports can be found here: San Francisco & Bay Area Market Reports


    These analyses were made in good faith with data from sources deemed reliable, but may contain errors and are subject to revision. It is not our intent to convince you of a particular position, but to attempt to provide straightforward data and analysis, so you can make your own informed decisions. Median and average statistics are enormous generalities: There are hundreds of different markets in San Francisco and the Bay Area, each with its own unique dynamics. Median prices and average dollar per square foot values can be and often are affected by other factors besides changes in fair market value, and longer term trends are much more meaningful than short-term. It is impossible to know how value statistics apply to any particular home without a specific comparative market analysis.

    © 2016 Paragon Real Estate Group

    Midway through the Spring 2016 Selling Season - May 2016 Update

    San Francisco Median Home Price Appreciation

    Short-Term & Long-Term Trends

    As seen in the first chart below, the combined house-condo median sales price hit a new high in April. However, the year-over-year rate of appreciation appears to be slowing, and as the second chart illustrates, so far this year, while median house prices continued to increase, condo and TIC prices have generally plateaued. 2012-2015, spring was the most dynamic, high-demand/low-supply selling season of the year.

    Market Dynamics by Property Type & Price Segment

    As mentioned in our April report, different segments of the market appear to be diverging. The below charts separate the San Francisco homes market into house and condo/ co-op/ TIC segments, then further subdivide each by 4 price ranges. The lowest, most affordable, price segments are defined by the median sales prices for the first 4 months of the year. The highest price segments (or luxury home sectors) are defined, approximately, by the top 10% of sales.

    Very generally speaking, the house market has remained hotter than the condo market, which appears to have cooled to some degree (but nothing remotely approximating a “crash”), and more affordable homes are seeing significantly greater demand than luxury homes, where the pool of potential buyers is much smaller. The luxury condo market, in particular, may be being impacted by an increase in large, new, luxury condo projects arriving on market, especially in those districts where they are mostly being built. The number of resale luxury condo listings in San Francisco hit an all-time high in April.

    The analyses do not include new-project condo activity unreported to MLS, which is now a significant portion of the market: Unfortunately, our access to definitive data regarding current activity in new condo sales is limited.

    More on the luxury market:    SF Luxury Home Market Analytics

    More on the luxury market: SF Luxury Home Market Analytics

    Percentage Changes in Median Sales Prices
    & Average Asking Rents, 1994 to Q1 2016

    The first chart tracks year-over-year changes in annual median sales prices for San Francisco houses. The year of greatest percentage appreciation was 2000 at the height of the dotcom bubble (though on a dollar appreciation basis, recent years far exceeded earlier periods). This is a generalized overview: Homes in different neighborhoods and in different price segments often saw wide variations in annual appreciation rates.

    More on real estate cycles:   30+ Years of Bay Area Real Estate Cycles   

    More on real estate cycles: 30+ Years of Bay Area Real Estate Cycles 

    This second chart illustrates appreciation in average asking rents. Note how much rents declined after the dotcom bubble ended, while the effect of the 2008 financial markets crash was much milder. We have heard from multiple city sources that available rental inventory has significantly increased and renter demand significantly decreased in recent months, which may reflect a possible softening in new, high-tech hiring. We shall see if this begins to show up more definitively in upcoming rent and employment statistics. Or it may simply be a temporary lull in the market.

    More on SF & Bay Area Rents:    Rent Trends Report        Our Q1 report on the apartment building market:    Bay Area Apartment Building Market

    More on SF & Bay Area Rents: Rent Trends Report 

    Our Q1 report on the apartment building market: Bay Area Apartment Building Market