Why the Luxury Home Market Changed

I met up with my clients on a brisk weekday evening for a private property showing. It was for a beautiful condominium in one of San Francisco's most prestigious (and expensive) neighborhoods. Upon leaving the property, my clients asked me, "Why's it been sitting on the market for so long?" As of today, the listing has been on the market for over 50 days.

A lot of home buyers look at stale properties and assume that there's something wrong with the building. Maybe the sellers are hiding material facts. Or perhaps there's a mummified body in the attic. It's an easy assumption to make, especially in the context of this past Spring.

The truth is, the home was perfectly fine and everything was move-in ready. The property had even gone through a considerable price reduction. What's going on?

One indication of a Buyer's vs Seller's Market is the month's supply of inventory (MSI). It measures the number of months it would take to sell the existing inventory of homes for sale at current market conditions. A seller's market in San Francisco is typically anything below ~3 months. As you can see above, October's MSI for luxury homes and condominiums is significantly higher than it has been year-over-year.

Let's put this in context with the rest of the San Francisco's real estate market. Per the SFAR MLS, the current MSI for homes under $2m is still under 2 months. This is very low and indicative of a strong seller's market. The techies are still here, and the gentrification is still spreading. What happened?

My thoughts on the situation:

  1. The stock market's recent volatility this past August and September are likely reducing their propensity to buy (e.g. China's real estate crisis and the ripple effect from their stock market's recent crash).
  2. San Francisco real estate values for many properties hit historical highs this year. After observing the Spring frenzy, many of these homeowners probably felt like cashing out vs buying high.
  3. Buyers are burned out and looking elsewhere. With over 14% year-to-date appreciation in 2015, many people are deciding to buy in neighboring cities such as Oakland and Marin.
  4. Many agents did not adjust for these changes in the marketplace, which resulted in overpriced properties. I see more listings in this segment undergoing price reductions than earlier in the year.

While sellers in the luxury home market may be feeling anxious, this cool-down has created opportunity for buyers. With more inventory to choose from, many stale properties with price reductions, and the seasonal holiday slow-down, this market segment's equalization has become a great time to snatch up deals.