San Francisco 'froth is gone' as wealth fades, housing slumps

A palatial five-bedroom home built in 1932 with stained-glass windows, hand-carved doors and jaw-dropping hillside views of downtown San Francisco hit the market in April for $9.5 million. In June, the owners dropped the price to $7 million.

It went up for auction last week with an opening bid of $4.5 million. No offers emerged.

That kind of pullback is a stark turn for a tech-fueled city long marked by extreme wealth and ever-escalating home prices. Now, as the U.S. housing market slows from a pandemic-era frenzy, the San Francisco area stands to be among the hardest-hit places. 

Higher mortgage rates are driving up the cost of ownership and fewer people are willing or able to pay a premium for living in the country's most expensive region for housing. And the area's wealth economy is shuddering under the weight of tech-industry layoffs, falling stock prices and plunging cryptocurrencies.

The real estate market is already taking a hit: The San Francisco metro area's median home price fell 0.5% in June from a year earlier to $1.58 million, according to Redfin Corp. It was the only one of the country's top 100 metro areas to record a decline, the company's data show, even as the price was still the highest in the US.

"The bloom is off the rose," said Steve Gallagher, a Coldwell Banker Realty agent selling the 1932 home. "Even big buyers who'd pay cash for a $10 million home are thinking twice. It's the economy, interest rates, the stock market, inflation."

San Francisco's economy is already struggling to rebound from the pandemic as remote work proliferates, with tech companies including Twitter Inc. and Salesforce Inc. cutting back on office space. For-lease signs plaster shuttered cafes, restaurants and drugstores that depended on office workers for business. Homeless encampments, open-air drug use in some neighborhoods and crime concerns aren't helping to lure people back.

Until this year, many San Franciscans felt the wealth effects of an economy flush with easy money. As startups ballooned into unicorns, an influx of tech workers transformed much of the city and pushed home prices up almost 120% in the past decade, according to Redfin.

But some residents fled from those high prices during the pandemic, and tech companies have signaled they're open to hiring from anywhere in the country — or are slowing hiring completely. The venture capitalists who financed the city's startup culture have retreated to Sand Hill Road near Stanford University or to working virtually from the cloud. And the prospect of a recession adds a sense of gloom.

"Most people didn't cash in, but they felt better," said Ken Rosen, chair of the real estate department at University of California, Berkeley's Haas School of Business. "The froth is gone, so now they feel worse."

Some tech executives and engineers who bought property by borrowing against stocks, a move that avoided capital gains when values were at their peak, are now having to refinance with more expensive mortgages, according to Aaron White, chief growth officer at advisory firm Vista Wealth Management in San Francisco.

"A lot of people who didn't sell last year at the peak are regretting it," said White, whose firm has about $3 billion under management. "And we don't see people asking for crypto."

For startup investor Brianne Kimmel, San Francisco now feels unsafe and too far out of the action. After living in the city for seven years, she decamped to Los Angeles this spring.

"Prior to the pandemic the majority of my investments were Bay Area based companies, however now most of those companies are remote-first and new investments have been in NYC, LA, Sydney, and other tech cities," said Kimmel, 33.

In July, she opened a studio in LA's Silver Lake neighborhood to host speakers, streetwear and foodie events for the startups her firm, Worklife Ventures, seeds with initial investments as high as $2 million. 

"We're not anti-SF, however with crime rates and restaurant closures, we couldn't find a neighborhood that would work for the types of programming we offer," Kimmel said. She recently hosted a pop-up shop with a seller of Chrome Hearts jeans, which she said can cost more than $20,000. "I wouldn't feel comfortable holding expensive inventory in San Francisco," she said.

The city has struggled with perceptions of rising crime after high-profile smash-and-grab thefts, even as police data show robberies and assaults at roughly the same level as 2019. It's stretching even to the wealthiest residents: Hamid Moghadam, the chief executive officer of real estate giant Prologis Inc., was robbed at gunpoint outside his Pacific Heights home in June, an incident he said made him reconsider living and running a company in the city. He co-founded the predecessor to the warehouse owner, which now has a market value of almost $100 billion, in San Francisco in 1983.

He wrote a letter to officials including Mayor London Breed and California Governor Gavin Newsom, saying he is "deeply concerned that our city may be so far down the path toward decline that we may never recover." City officials took notice of his concerns, Moghadam said in an email to Bloomberg.

"I'm not going to make a relocation decision based on one incident," he said. "That said, there needs to be the will to fix the city's problems."

The Bay Area still leads the U.S. in its share of venture-capital funding, attracting $52.3 billion, or 36% of the U.S. total in VC cash this year through June, according to Pitchbook's NVCA Data Monitor. New York was a distant second with $19.8 billion, or 14%. And the region is still home to giants such as Apple Inc. and Alphabet Inc., two of the world's most valuable companies.

"For executives and folks who have 'made it in tech,' I don't believe SF is dead," Kimmel said. "The broader Bay Area still has the top schools in the country and it's a great place to raise a family. It's just expensive."

This year's near doubling of mortgage rates makes that priciness all the more difficult for would-be homebuyers. The last time borrowing costs significantly jumped, in late 2018, San Francisco housing prices were buoyed by anticipated initial public offerings, such as Uber Technologies Inc. and Pinterest Inc., that supercharged the local sense of affluence. Now, the IPO market has dried up.

Before interest rates surged this year, San Francisco sellers often listed homes for below market prices, a strategy that fueled ruthless bidding wars. These days, marketing styles and expectations have changed, according to Gallagher, the Coldwell Banker agent.

"Transparent pricing — that's the new term," Gallagher said. "That means they'll take the asking price."