San Francisco has been the subject of a lot of negative press over the past several years. It was hit hard by the pandemic exodus from cities, the shift to work from home that emptied offices, the crime and homelessness that marred its national reputation, and pledges by corporate leaders such as Elon Musk to relocate their company headquarters elsewhere.
But at a time when housing is expensive almost everywhere and people are looking for good value, San Francisco presents one of the best buys out there on a relative basis — at least compared with its historically high costs. The factors that have led to its underperformance in recent years are largely in the past, and, despite the drumbeat of pessimism, there are reasons to be optimistic about the city’s future.
In arguing that housing in one of the nation’s most expensive markets is good value, one must first acknowledge that San Francisco deserves a premium to the US housing market as a whole. The key question is just how big that spread should be. Using the S&P CoreLogic Case-Shiller dataset, the ratio between the gauges for San Francisco and home values across the US has fallen substantially since early 2022 and stands at its lowest level since mid-2013.
In fact, that ratio is around where it was in 2003, a time when the city had an unemployment rate of 7% at the tail end of the dot-com bust. This was before Facebook or the iPhone or the initial public offering of Google. Essentially, over the past 20 years, as San Francisco became the undisputed technology capital of the world, playing a part in trillions of dollars of value creation and drawing scores of ambitious professionals, its home prices grew at merely the same rate as US home prices overall. And let’s not forget that very little housing was built in the city over this stretch.
There are some obvious reasons why home prices have underperformed in the recent past, lowering that ratio. Following a mass urban exodus during Covid, the tech industry has been one of the biggest laggards when it comes to returning to the office. It was also among the hardest hit by the end of rock-bottom interest rates, leading to widespread job cuts and hiring freezes. Relentless headlines about crime and homelessness haven’t helped, nor have soaring mortgage rates, which crushed affordability in an already unaffordable city.
But on all accounts, the worst seems to be behind us. By now, the pandemic exodus and negative impact of work-from-home are in the rearview mirror. Maybe the people who left for cities such as Austin won’t come back, but there will always be a new crop of young people looking to chase their fortunes in tech.
The comparison to Austin is useful because of how much home price growth has diverged between the two cities. On a purely nominal dollar basis, Austin remains much cheaper than San Francisco — single-family homes sell for around $600,000 there compared with $1.6 million in San Francisco, according to Redfin. But Austin prices have soared by about 60% since the end of 2018 compared with just 12% for San Francisco, according to the US Federal Housing Finance Agency. If you’re worried about a bust in the future, it’s unlikely to come from the city that didn’t boom.
And the burst of activity around artificial intelligence should keep the region at the center of what could be a new wave of innovation and entrepreneurship. Not only is pace-setter OpenAI headquartered in San Francisco, where it has been looking for more office space in recent months, but also half of all global venture funding for AI-related startups is going to companies based in the Bay Area.
Crime and governance are another area where the worst appears to be in the past. Property crime is down 32% in the city this year. On recent earnings calls AvalonBay Communities Inc. and Equity Residential Property Trust, both apartment REITs operating in the city, highlighted the improved performance of their properties there and growing optimism that the governance situation will improve following turnover in local elections.
And perhaps no city stands to benefit more from lower interest rates once the Federal Reserve begins to ease policy this year. Cheaper mortgage rates pack a bigger punch when you’re dealing with homes selling for more than $1 million, and less onerous borrowing costs could get tech companies to pivot back somewhat toward growth over profitability, leading to a new hiring cycle.
San Francisco real estate will never be cheap, but with a lot of potential catalysts on the horizon, it may never again be cheaper than it is today.
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