Current supply is determined by current prices AND expected future prices.

If you ever wondered why the supply of homes for sale in San Francisco is so tight even though San Francisco home prices are so high, this video is for you!

San Francisco: Case-Shiller & Zillow Percentage of Homes Increasing in Value

The most interesting change this month was in San Francisco, that’s why I made this post about San Francisco.

San Francisco Home Price Index and Percent of Homes Increasing in Value

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You can see that the Case-Shiller home price index for San Francisco (blue line) is losing a lot of its steep upward momentum.

Also notice that home prices have a huge tendency to increase in the first part of the year in San Francisco and to be more or less flat in the second half of the year, even in years when the first half was super strong.

In 2016, however, the increase in the first half of the year was smaller than any year since 2011 but, in addition, the high season ended earlier in 2016 (April) than in any year since 2011. The San Francisco real estate market is losing its insane mojo.

Key = Expected Future Home Prices

The effect I talk about in the video says that as people realize that home prices in their town aren’t increasing as fast anymore, they’ll lower their estimates of what they think their homes will be worth next year. As that happens some people will become more likely to put their homes up for sale this year.

Guess = Future Expected Prices Based on Prices Last ~3 Years

People’s expectations of future home prices don’t change just because home prices were down one month. I think the typical homeowner sort of intuitively weighs the home price gains they’re seen over the last ~three years and projects that out to next year.

Feedback Loop

You get this feedback loop;
Rapidly Rising Home Prices –> Lower Supply –> Higher Prices –> Lower Supply… and so on.

The real danger is when this effect happens in reverse – rapidly falling prices lead to more supply which leads to lower prices and so on.

I’m surprised that the impact of this basic economic fact – expected future prices – isn’t talked about more.

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