Many adjectives are used to describe San Francisco, but normal isn't a common one - and the same can be said about our real estate market. Even taking into account its tendency to be unusual in one way or another, this past spring's market was overheated by virtually any definition. Surging consumer confidence and huge buyer demand chased a deeply inadequate supply of homes for sale, abetted by interest rates so low that loans - factoring in inflation and mortgage interest deduction - were almost like free money. All this led to an extreme seller's market, a feeding frenzy and dramatic price appreciation. It is not, in our opinion, a bubble. The Economist, one of the first to sound the alarm for the last bubble, sees no sign of a U.S. housing bubble, basing its conclusion upon historical comparisons of home prices with rents and incomes. Also, it is not unusual for the market to go somewhat crazy following a 4-5 year down cycle after all the repressed demand bursts forth - this happened in 1996-1997 too. Besides which, we are only about 18 months into the current recovery. Though real estate is susceptible to sudden economic and political shocks, in past cycles, recoveries have typically lasted at least 6-8 years before peaking. That doesn't mean there won't be any short-term market adjustments, up or down, for one reason or another, along the way.

There are some signs of a normalizing market. After a year of declines, the number of new listings in the 2nd quarter was a little higher than the 2nd quarter of 2012. Though this inventory was quickly gobbled up and overall supply remains very low, it's a good sign more sellers are entering the market. Median prices may be leveling off after spring's big pop - it's still too soon to be sure, but summer often sees a cooling down. It's not welcome news to buyers, but interest rates have increased from extreme lows - though remaining very low by any historical scale. (See below: The Sky is Not Falling.) The distressed home segment, which always distorts markets, is disappearing in the city and declining everywhere. And new-home construction continues to increase: even though we won't see much of this new inventory until 2014 and later, it's a very positive sign.

San Francisco Median Home Prices

For both houses and condos, the second quarter saw jumps well above previous peak values. Median sales prices are affected by other factors besides changes in value - seasonality, inventory, buyer profile, big changes in the distressed and luxury home segments - but the dramatic increases do reflect rapidly climbing home values in the city. Though all SF neighborhoods have been experiencing striking appreciation, this does not mean that all have now exceeded previous peak values.

Interest Rates: The Sky Is Not Falling

Not to diminish legitimate concerns regarding rising mortgage rates and their effects on housing costs, but this graph puts recent increases in context. At any time before 2011, the current interest rates, even after their recent big percentage jump, would be reason for conga lines of celebration in the streets. Rates had to rise from their historic and artificial lows - how far and fast this may continue is unknown to us, but we don't presently expect big shocks to the real estate market in the near future.

Sales Over & Under Asking Price

This chart illustrates the enormous percentage of listings selling for over - and sometimes far over - asking price. 25% of house sales in June sold for 20% or more above list price: At San Francisco prices, 20% above asking often equals hundreds of thousands of dollars.

Months Supply of Inventory (MSI)

Even with the increase in new listings in the second quarter, inventory as compared to demand remains drastically low.