Markets

Reality checking real estate (SF & Seattle edition)

A macro analysis of major metro home price performance and affordability.

In Reality checking real estate I outlined a macro analysis of residential real estate performance and affordability based on national average data. I also used Sacramento, CA to illustrate how a local, tertiary market’s behavior can differ from national trends in the short-to-mid term but follows the general macro trend over the long term.

As a follow-up, this piece explores two major metro areas, San Francisco and Seattle, to see how high-growth markets might compare to the national benchmarks.

I chose these markets because they are tech industry hubs whose populations have also experienced higher-than-average income growth and have similar geographic constraints that limit urban sprawl. I wanted to see if real estate markets fueled by a major macroeconomic growth trend like technology could overcome the purchasing power downdraft seen in the national averages.

Note: This analysis is also based on FRED Economic Data published by the St. Louis Fed, which covers 1981 through Dec 31, 2020 (next release is late May 2021).

With that, let’s dive in!


San Francisco

Performance

Performance Index: Nominal

Since 1981, nominal San Francisco home prices have risen 9.11x and outperformed the national average by 2.02x.

San Francisco Home Price Performance Index
Performance Index: M2 Adjusted

In purchasing power terms…

  • Since 1981, San Francisco has performed meaningfully stronger than the national average but still followed the macro downtrend (albeit to a lesser degree). San Francisco was also meaningfully impacted by the 2008-2012 macro devaluation but has done well since with what appears to be a /M2 cycle top in mid-2018.
  • Short-to-mid term speaking, San Francisco is very much a cyclical market meaning cycle timing has a major impact on performance.
M2 Adjusted San Francisco Home Price Performance Index
Home Price Index Multiple

The Home Price Index Multiple does a great job of highlighting San Francisco’s consistent outperformance of the national average (trend channel added to highlight cycle tops and bottoms).

After reaching was appears to be a cycle top in mid-2018, the indicator has fully retraced back below the channel into “bottom” territory. Historically, cycle corrections have lasted ~5 years and found bottoms near or just above the previous cycle highs.

I’ll be very curious to see if the pattern holds true over the next few years or if we’re witnessing a macro trend break stemming from much of the tech industry decentralizing and going permanent full remote due to the pandemic.

San Francisco Home Price Index Multiple

Affordability

Home Affordability Index

San Francisco’s Affordability Index has been rising steadily, albeit with prominent cycle swings. This aligns with it being a technology hub with above-average income growth. In the future, it would be interesting to compare prices to local average income to get a more localized affordability snapshot.

San Francisco Home Affordability Index
Home Affordability Index Multiple

Similar to the Home Price Index Multiple above, the Affordability Index Multiple does a great job of highlighting that the price/income relationship is preserved even in high-growth markets (trend channel added to highlight cycle tops and bottoms).

One key difference worth noting is the price multiple has corrected far more than affordability, which is still in the upper half of the channel mid-zone. This indicates that prices could continue lower until affordability also fully resets. Cycle bottoms tend to occur when both price and affordability multiples reset to the bottom of the trend channel, so I’ll be watching both closely to see how things evolve in the years ahead.

San Francisco Home Affordability Index Multiple

Seattle

Performance

Performance Index: Nominal

Since 1981, nominal Seattle home prices have risen 8.66x and outperformed the national average by 1.92x.

Performance Index: M2 Adjusted

In purchasing power terms…

  • Since 1981, Seattle has performed meaningfully stronger than the national average but still followed the macro downtrend (albeit to a lesser degree). Seattle was also meaningfully impacted by the 2008-2012 macro devaluation but has done well since with what appears to be a /M2 cycle top in mid-2018.
  • Short-to-mid term speaking, if you owned 1990-2007 or 2013-Present, you maintained or increased purchasing power for extended periods of time. But, the 2008-2012 period highlights how much cycle timing impacts performance.
Home Price Performance Index: Seattle M2 Adjusted
Home Price Index Multiple

The Home Price Index Multiple does a great job of highlighting Seattle’s consistent outperformance of the national average (trend channel added to highlight cycle tops and bottoms).

After reaching was appears to be a cycle top in mid-2018, the indicator has retraced back into the channel. Historical cycle corrections have lasted ~5+ years and found bottoms near or just above the previous cycle highs. I’ll be curious to see if the pattern holds true over the next few years.

Seattle Home Price Index Multiple

Affordability

Home Affordability Index

Seattle’s Affordability Index has been rising steadily. This aligns with it being a technology hub with above average-income growth. In the future, it would be interesting to compare prices to local average income to get a more localized affordability snapshot.

Seattle Home Affordability Index
Home Affordability Index Multiple

Almost identical to the Home Price Index Multiple above, the Affordability Index Multiple does a great job of highlighting that the price/income relationship is preserved even in high-growth markets (trend channel added to highlight cycle tops and bottoms).

Seattle Home Affordability Index Multiple

Takeaways

To wrap up, I want to point out something that totally blew me away. I was expecting similarities between San Francisco and Seattle, but it turns out that the slope of the Price and Affordability Index trend channels are identical for both markets.

Take a look at them side by side below:

San Francisco Home Price Index Multiple
Seattle Home Price Index Multiple

The one difference you’ll notice is San Francisco’s channel is wider. This means San Francisco’s cycles are more amplified than Seattle’s.

Both markets demonstrating the exact same growth rate leads me to the conclusion that home prices are generally reflecting the predominant underlying economic trend (technology) that’s driving above-average income growth in both markets at the same rate.

Putting these market conclusions together with the ones from Reality checking real estate, here’s how I’d summarize my residential real estate performance takeaways:

  • In purchasing power terms, residential real estate’s dominant long-term trend is down.
  • Markets that are home to high-growth economic trends that produce high-income growth (like technology) can dampen the long-term downtrend, but not overcome it.
  • Local markets are generally very cyclical and short-to-mid term performance is primarily dependent on cycle timing.

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