2014 was another strong year for real estate in San Francisco, if not one of the strongest we have ever seen in terms of home appreciation and the amount of buyers actively in the market. This is due, in part, to the lack of housing units available for sale. Homes were not built fast enough to keep up with the demand. The combination of low inventory and historically low interest rates then contributed to the appreciation we have seen here in the city and throughout the Bay Area.
Recovery from such a scenario usually takes about three years, but it looks like San Francisco’s recovery will take just one and a half to two years time. We are also now in the second phase of a typical two-phase cycle. During the first phase, cash and investment buyers tend to dominate the market. During the second, we see more buyers purchasing with financing.
Outlook for Buyers
Although there is no crystal ball that can predict what will happen with certainty, interest rates are expected to rise, but will stay modest from an historical perspective. I’ve always advised buyers: “If you can afford to buy something now and if the purchase makes sense, then buy it. Don’t wait for a ‘slow down’ or rates to shift, as you might miss an opportunity, or even get priced out of the market.”
If interest rates do rise while housing prices level off or continue a modest appreciation, the monthly cost of a home could be the same as it is now. Base your decisions on what we know now, rather than on what might happen. The first part of the year should continue to see multiple buyers bidding on a given property. A modest rise in prices is also expected, although the days of 20+ offers and 25 percent over asking will become a thing of the past.
Outlook for Sellers
We have seen one of the strongest home value recoveries in history. Year after year, gains in home values have been fueled by low interest rates, lack of housing units, higher consumer confidence and a lower unemployment rate. This creates an ideal scenario for sellers, but not for buyers over time. With the Federal Reserve beginning to talk about raising interest rates during the middle or end of this year, we will begin to see a shift in the market. Although we won’t see a leveling off, we will see a market that will begin to balance between buyers and sellers. If you are thinking about selling, now is the time. If you have outgrown your current home and are thinking about moving up, your time is just around the corner.
San Francisco Hot Spots
Location, location, location has always held true when purchasing real estate. We have seen home prices rise the fastest in areas more centralized to downtown. As buyers become priced out of these neighborhoods, they look to up-and-coming neighborhoods still within San Francisco. We have already begun to see a change in the dynamic of areas such as Mission Bay, Bayview, Ingleside and Crocker. “The Shipyard” (Candlestick Point) is undergoing one of the largest redevelopments since what occurred in the Sunset. Although the aforementioned areas tend to attract more visionary buyers, this could evolve into something truly amazing, as we saw when the Mission Bay neighborhood previously went through redevelopment.
What is needed to balance the market?
I don’t want to be the bearer of bad news, but we need interest rates to rise a bit. We are seeing a flood of buyers in the market and, although there is an aggressive building boom, this will only make a small dent in relieving the supply versus demand problem. An often forgotten, yet important sector, of our real estate market are the sellers that want or need more home space. A gradual increase in interest rates could lead to more of these so-called “move up” sellers. That’s because recent years’ markets have been so strong that they have left some sellers sitting on the sidelines who would like to “move up,” but do not do so because of uncertainty in finding a replacement property. When the confidence of these sellers rises, such that they can sell their current home and find a replacement property, it will help to increase inventory and relieve some of the competition for buyers.
George Langford is a senior sales associate at CLIMB Real Estate group in San Francisco and is the founder of SevenSquaredSF.com Let his expertise guide you to your new home, or help you to get the best price for your current one. To contact George, please phone 415-336-8191 or e-mail him at langford@climbsf.com
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