As your local real estate experts, we feel it’s our duty to give you, our valued client, all the information you need to better understand the complex San Francisco real estate market. Whether you’re buying or selling, we want to make sure you have the best, most pertinent information, so we’ve put together this monthly analysis breaking down specifics about the market. It’s all part of our mission to give you the very best in personalized service. We would love to know what you think!
– Anthony Navarro, DRE #01491847
Comparative Market Analysis 101: Comparable Listings and Sales
Conducting a Comparative Market Analysis (CMA) is the first step in determining the value and price of a home. It’s not as straightforward as it might seem. For example, two homes that sit side by side may seem like obvious comparables (or comps). If the interior of one has been recently updated and the other hasn’t been renovated in 30 years, their comps will be dramatically different.
In addition to analyzing comps, an experienced listing agent will consider additional critical factors to determine a fair market price for a home. Typically, an agent will:
- Identify homes in the area that have been listed and sold within the last three months which are:
- Within a ¼ to ½ mile radius of the home being priced
- Within a 10% variance in size (square footage) of the home being priced
- Similar in age (year built) of the home being priced
- Collect at least three valid comps based on the criteria above
- Compare final sale prices to the original list prices and note any price reductions
- Note any expired or withdrawn listings that were taken off the market and re-listed
After gathering this information, the agent will conduct a comprehensive analysis between the home in question and the comps, making pricing adjustments as needed. For example, if a home that’s being listed is in a better location or has more bedrooms than the comps, the price may go up accordingly.
While sellers look to comps for information on how to price their home, buyers can leverage comps to make sure they’re putting in a fair offer. Knowing what similar homes in the area were listed for, and what they ultimately sold for, is a great way to figure out a competitive offer price.
Overall Housing Market Analysis
After carefully researching comps, it’s important to analyze local market data and trends to assess market price direction and understand whether the market favors buyers, favors sellers, or is neutral. Here’s what these data points may mean to you:
- In a buyer’s market, prices are usually declining because there are more homes for sale than there are willing buyers. In a buyer’s market, homes should be priced slightly lower than the competition.
- In a seller’s market, prices are usually higher because there are more buyers than there are homes for sale. In a seller’s market, homes can be priced above comparable sales, sometimes upward of 10%.
- In a neutral market, prices are steady because there’s a balance between buyers and sellers. Homes in this market should be priced in line with comparables.
Now let’s take a look at what’s happening in our market this month.
Current Housing Trends in San Francisco
Based on the October 2019 data, the housing market in San Francisco is a seller’s market.
In the following section, we’ll consider two primary housing trends: median home prices and month’s supply (a combination of sales and inventory). We’ll also examine two secondary trends: number of days on market, and average sold price compared to original list price.
Let’s start by comparing median home prices for San Francisco from October 2019 with prices from October 2018. Yearly comparisons are important because they remove variations due to seasonality.
When analyzing median home prices, it’s important to take note of both the direction and the degree of price-change from the same time last year. If home prices have increased by a significant margin (10% or more), then buyers and sellers should expect home values to increase compared to past comps. In San Francisco, median prices have increased by 3% compared to the previous year for single-family homes and 9% for condos, meaning that they are up, but not enough to create significant price increases compared to comparable home sales (based solely on home prices).
In San Francisco, median home prices saw significant gains year-over-year from 2010 until the beginning of 2019. From that point on, home prices leveled off and closely tracked those of the previous year. On its own, this data would suggest that homes should be priced in line with their previous sold comparables.
Next, let’s examine month’s supply.
Month’s supply measures how many months it would take for all current listings on the market (including listings under contract) to sell at the current rate of sales. Nationwide, most analysts consider six months of supply to be a balanced market between buyers and sellers. A low level of supply means that there’s more buyer demand than there are homes for sale. In this environment, sellers may list their homes for more than the comps would indicate, get multiple offers, command higher prices through a bid process, and/or sell the home quickly. For a market with high supply, generally, the opposite is true.
Month’s supply is well below the six-month level in San Francisco, which indicates a seller’s market with plenty of buyer demand. Even for California’s high-demand market where experts define “balanced” as having a much lower month’s supply, 1.3 is incredibly low. Simply put, there are many more buyers than available housing.
Again, supply measures the time it would take to sell (sales) all of the current listings (inventory). We can take a closer look at those two individual factors below.
Sales measures how many homes are sold in a given month. For a seller, this number is driven by the level of demand and the number of buyers in the market. Very low or very high sales can influence how a seller prices their home. For example, very low sales, which equates to very low demand, might encourage sellers to price their homes more competitively.
Sales in San Francisco have trended lower over the past year and are down for both single family homes and condos. Typically, this would indicate that buyer demand is down (and suggest a buyer’s market) but much of the slow sales has to do with a lack of available homes to buy.
This brings us to inventory.
Inventory measures the number of homes listed for sale. For sellers, it’s an indication of how competitive the market is. For buyers, it measures how many options are available on the market. Very low or very high inventory can influence how a seller prices their home. For example, higher inventory levels mean that sellers have more competition, and potential buyers have more choices. In this scenario, a seller might price their home more competitively, while a buyer may come in with a lower bid, especially if they’ve seen lots of price reductions in the area.
Inventory levels in San Francisco have fallen year-over-year from levels that were already extremely low. With very little available inventory, sellers have the upper hand.
Now that we’ve thought about home pricing based on the CMA and the two primary market trends (median home prices and supply), let’s shift our focus to days on market and the average sold price as compared to the original list price. We’ll see how understanding both of these factors can help sellers avoid the critical mistake of overpricing a home.
The Risk of Overpricing Homes in San Francisco
While underpricing a home can leave money on the table for the seller, the market usually corrects this mistake naturally when multiple offers drive the price back up to its market value. The real danger lies in pricing a home too high—a mistake that can be made even in a seller’s market and one that leads to increased time on the market and a lower final sales price.
Using market data from October 2019 for San Francisco, let’s separate sold homes into two categories: homes priced correctly (and sold without a price reduction) and homes that were overpriced (and had one or more price reductions).
It is important to realize just how common price reductions are even in a seller’s market. In San Francisco, over 10% of single-family homes experienced a price reduction. This number was higher for condos, where 15% had reduced prices.
Across all three areas, a clear pattern emerges when we look at the number of price reductions over the last two years: the number of price reductions goes up when home prices are trending down. When interest rates caused home prices to decline this past winter, the number of homes that had a price reduction rose to over 20%.
The chart shows the final sold price of a home compared to its original list price. What’s clear is that overpricing can lead to a loss of home value.
Single-family homes without a price reduction sold for 113% of their original list price, while homes sold with one or more price reductions sold for 96% of their original list price. That’s a difference of 17%. Using the median sold price ($1,650,000) for single-family homes in San Francisco in October, that translates to an average per-home loss of $280,500. The difference in home value remains consistent regardless of the time of year.
We can use price-change data to understand the conditions of the market (favoring buyers vs. sellers or remaining neutral) and for pricing and negotiating offers. When homes consistently sell above list price, the market is considered to be a seller’s market, and buyers and sellers should expect to negotiate accordingly. In San Francisco, buyers and sellers should expect to negotiate a home above its listing price, assuming that the home is priced correctly.
Let’s look at the median number of days on market for homes sold in October to see how overpricing played out.
Single-family homes that sold without a price reduction were on the market for only 20 days, while ones with one or more price reductions spent over twice as long (48 days) on the market. That extra month results in additional mortgage payments and extra days spent staging, showing, and selling the property. For time-sensitive sellers, the impact of overpricing is even riskier.
We know that overpricing a home comes with serious consequences. So why does it happen so frequently? Sometimes unlucky sellers simply get caught on the wrong side of the market and have to adjust their price accordingly. This can happen when interest rates increase, buyers get sidelined, and both demand and home values diminish. In this instance, the only way to sell is to be more competitive than everyone by slashing the list price.
More often, however, overpricing occurs either because the seller overestimates the value of their own home or the agent fails to help them set the right price. Unfortunately, some agents win business by claiming they can sell a home for an unrealistic price. The promise can be hard to resist. Who wouldn’t want extra cash to help fund the kids’ college education, pay down debt, or afford a bigger home?
The reality, of course, is that when an overpriced property remains on the market for longer than average, price reductions follow. Ultimately, the final sales price falls well below where the seller should have listed the property in the first place.
How to Make an Offer on an Overpriced Home
What happens when buyers find the home they want and realize it’s overpriced? Here are four strategies to keep in mind:
- First, look at the days on market to determine whether the home has been listed for longer than average. If it has, you know the home is most likely overpriced.
- Second, have your agent conduct a buyer Comparative Market Analysis (CMA) that proves to the seller the home is overpriced based on comps.
- Third, make your offer as attractive as possible (beyond the purchase offer). For example, include a mortgage pre-approval, put up a strong earnest money deposit, or waive contingencies.
- Finally, be patient. The seller and their agent may need some time to accept that their listing price is not competitive with the rest of the market.
Key Takeaways for Buyers and Sellers
- The first step to pricing a home is to find comparable listings and sales (CMAs).
- The second step is assessing the local market conditions to determine if the market favors buyers, sellers, or is neutral. Sellers should educate themselves about pricing a home correctly to avoid overestimating the value of their own home or being swayed by the unrealistic expectations of an agent.
- The two serious consequences of overpricing a home are the loss of home value and the increased time it takes to sell a home. Overpriced single-family homes in San Francisco spend an average of 2x more days on the market.
- Sellers need to do their homework and be realistic about the value of their homes. Buyers can provide their own CMA to a seller to negotiate a lower sale price for an overpriced home.
Pricing a home correctly takes both experience and market knowledge. To navigate the shifting real estate landscape, buyers and sellers need an agent they can trust. We’re dedicated to helping our clients achieve their goals, and we welcome you to contact us with questions about the current real estate market or for an evaluation of your home or condo.