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Home Prices Flattening, But Future Shortages May Loom

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In San Francisco's housing market, sometimes you just can't win

The supply-side argument for housing says that if we just build more, prices will go down. Well, the city has been building more, averaging one new unit per 3.1 resident last year.

And, according to data release by Paragon Real Estate last week, housing prices have started leveling off. The median price of a house in San Francisco is about $1.38 million in Paragon’s books, a two percent year over year increase. Compare this to the 23, 10, and 30 percent explosions we saw in the three years prior.

Previously surging condo prices ground almost to a halt, rising only $2,500 to a median of $1.125 million since last year, such a tiny increase that, statistically speaking, it might not really be an increase at all. Meanwhile, the number of expired listings is up 40 percent.

Paragon credits these trends to wobbliness in the tech sector, where "some of the wild exuberance leaked out" right around the same time housing inventory began to increase. At face value, it looks like the simple build-more plan is mostly working and we should keep doing what we’re doing, right?

Not so fast. As always, opinions vary.

Last time Paragon reported prices flattening, Garrett Frakes, a partner at Paragon competitor Polaris Pacific, called up Curbed San Francisco to point out that supply alone is only half the battle.

"It sounds as if there’s a tsunami of inventory, 60,000 plus homes in the pipeline," said Frakes. "Those are accurate figures, but there’s no context. Assume there’s 400,000 households in the city, and assume that a house has a lifespan of 100 years. That means we’d need to build 4,000 units a year" just to continue housing the population we already have.

Frakes took those particular figures out of the air just by way of example. But his larger point is clear: The number of units being built is only part of the equation. What's the projected future demand, and the attrition rate?

San Francisco has a population of about 864,816. The average household size is about 2.3 people. To keep the present population between four walls, we need to maintain (i.e., have enough stock, and then also build to replace stock lost) about 376,000 homes.

According to the most recent Housing Inventory Report, we’ve got 382,500 homes right now. (The census estimates even more at 390,204.) Whew.

However, we can’t assume that’s good enough: For one thing, 0.3 percent of San Francisco homes are vacant . And even if we did get a 1:1 households to available houses ratio, not every family will end up finding a home they can afford. And of course, these are just back of the envelope averages we’re throwing around; there’s a pretty big margin of error.

On top of that, 9,930 people have moved into the city every year since 2010, when the population was only 805,235. If that 2.3 household figure holds, we’d need at least 3,440 new homes a year to keep up. But we gained only 2,954 homes last year.

And the city predicts we will need even more: As the rate of ingress increases—and, per the Polaris warning, old stock is lost—it may take as many as 25,774 new homes by 2022, 4,295 homes a year.

But things appear to be mellowing a bit in the short term, so perhaps our present performance is enough for now. We’ll see whether prices actually go down and stay down in the months to come.