Advice for San Francisco Buyers and Sellers
Buyers. My advice is always this: Buy what you can afford AS SOON AS you can afford it. Home price appreciation in SF tends to outpace your individual ability to save (except you lucky techies who just sold an app or cashed out your stock options for beaucoup bucks!).
There is a saying in real estate that the best time to buy a home is 10 years ago. The 2nd best time? Today. This holds true more in San Francisco than practically anywhere else in the world.
Sellers. Sellers, let’s list and get you on the market…ASAP. Please avoid old-school advice saying you need to wait for the so-called Spring market. For the 4th year in a row, buyers are driving the market in the beginning of the year. They are out shopping and there is very little listing inventory right now, meaning your home is more likely to stand out and sell for a premium. We had 150 buyers at last weekend’s open house!
Major Trends in the San Francisco Housing Market
Here are more trends that will affect San Francisco in the coming year:
Moderate to Medium Home Price Appreciation
Home prices will continue to appreciate in 2015 though at a lesser clip. San Francisco real estate home price appreciation cycles tend to last about 5-7 years. Our last recovery began in 2011 and in general, the real estate market is up 45%. Don’t forget that all markets are cyclical but in SF over the past decades, the recovery has more than made up for any correction, quickly and sharply.
If you’ve been on the fence about selling your home, you’ll want to act in 2015. No one knows when the market has shifted until after the fact.
If you’re a buyer, worry less about where we are in the market cycle and more about the interest rate you’ll lock in. You’re better off in your own place with a low interest rate.
Rents will go up, as they always do, but your mortgage debt will go down (assuming a traditionally amortized loan) or at least stay the same (interest only payment). If you can afford it, why line other people’s pockets? (I have more thoughts on this. See San Francisco rental prices, below.)
Moderate Increase in Listing Inventory
There will be a continued exodus of boomers and middle and upper middle class families from SF; listing inventory will, for that reason, continue to be driven by folks selling in SF to buy in less expensive markets. And, of course, there are the probate and trust sales, another exit strategy.
As prices level, we may also see a slight increase in trade up and move up buyers (folks selling their starter home to buy the longer term family home). Still, because many people cannot afford a trade up home, exodus will be the word of the day. If you can afford to trade up, see my thoughts above…maximize your current home’s sales price and grab a rock-bottom interest rate on the next one.
Uptick in Mortgage Interest Rates
Some experts are saying the 30 year fixed rate will go to 5% while others say the Fed will not do a thing because the recovery isn’t as rosy as it looks (see bond market).
I have asked two of my preferred lenders, Stanley Erker, Home Mortgage Consultant, Wells Fargo Home Mortgage, and Phillip Cannon, Senior Mortgage Advisor, Opes Advisors, Inc., to weigh in. What they say is, if you look at historical rates, even if the 30 year rises to 5% as some predict, that’s still quite low. In between all of the potential issues nationally and internationally, I’m not convinced they will rise this much.
Probably, we will see the Fed act midway through the year to test the waters. I don’t see this impacting the SF market. Affordability is already so low in SF that the buyers who can afford to buy can do so even if rates increase a little.
Increase in the Portfolio (Jumbo) Loan Space
Most inventory in San Francisco County exceeds the conforming loan limit of $625,500, so more buyers will be financing homes with portfolio mortgages or jumbo home loans.
For a condo or single family residence the standard down payment requirement is 20%, but recent legislative changes will allow 10-15% down payments. With less equity, in 2015 you’ll need to show you have what it takes to to pay your monthly mortgage.
Things that will make you look good as a buyer include:
- Low debt to income ratio
- Excellent credit rating
- Secure employment and
- An established earnings history
Given the San Francisco housing market’s competitive offer environment, it’s important to closely analyze each buyer’s entire financial profile and develop a strategy so the most appealing offer can be presented sooner rather than later.
It’s important to look closely at a number of potential down payment sources, including vesting restricted stocks, upcoming performance bonuses, and gifts.
I encourage every potential buyer to begin the pre-approval process sooner than later…even if you are still in the down-payment-savings-mode. If nothing else, you’ll learn what you need to do make San Francisco real estate a reality for you.
Threats to the San Francisco Housing Market and Quality of Life
Who wouldn’t want to live in San Francisco? The problem is, SF’s bureaucracy and NIMBYism have not prepared us for the increased population we are facing and resulting traffic, deteriorating roads, inadequate public transit, longer commutes, and failing infrastructure.
It seems San Francisco is finally trying to catch up and address these issues but who isn’t complaining about the increased traffic and road construction both within SF and on the SF – Silicon Valley commute?? In 2015 you can look forward to more of the same.
The Continuing Effects of High Housing Prices
Affordability will also continue to be a problem in San Francisco in 2015. Dare I say, “duh”? The way it relates to the real estate market is a trickle down effect from current homeowners to would-be 1st time home buyers. See above on the trade up buyer.
Prices Up, Sales Down 2014 over 2013
We saw a decrease in inventory last year which lead to a continued increase in home values. You’d think that would be great news for homeowners (and it is!). But what if you want to move? What if you want more space or a new neighborhood? Your home is worth a lot but the home you want next is worth even more.
As values continue to go up, appreciation compounds, and trade up houses become more and more out of reach. We would have a lot more sellers, and therefore listings, if these would-be sellers could afford their trade up home.
When the trade up/move up buyer can’t buy, this trickles down to the first time buyer market. There are fewer and fewer homes priced to be “starters” sold in the San Francisco housing market. This is less of an issue in suburban areas but in tight inventory cities like SF, it is a major problem.
What came first, changing demographics, or high housing prices? San Francisco is facing the largest population (837,442 and rising) in its entire history. According to the New York Times, increasing housing prices coupled with lower inventory mean that people with teacher ($59,700) or police officer ($80,000) level incomes will be less and less able to afford homes in 2015 and beyond.
That’s why the majority of buyers will continue to be professional couples looking to grow their families, successful (read: high income) singles, including women home buyers (Hey, ladies!), and DINKs (double income, no kids). International buyers, especially from Asia, will continue to be major buyers, along with affluent boomers moving into the city for culture and purchasing full or part time pièd-a-terre residences.
Given high prices and changing demographics, should you rent or buy in San Francisco?
In 2015, Should You Rent or Buy?
You can probably guess what I’m going to say. If you can afford it, buy now. Owning a home in San Francisco is an amazing investment. But let’s talking about renting.
For years, buying a home did not “make sense” on paper. In other words, you could rent a home in San Francisco for less than the cost of ownership. But with the banks practically giving away money for free (super low interest rates) and the extraordinary increase in rents, I’ve heard from many clients that their mortgage is actually less than their rent or, at least, is less than the rent will be of the place with the space they need.
Let’s take the case of an individual or couple living in a small studio or 1 bedroom. They need more room and are looking at whether to rent or buy a 2 bedroom. If you combine market rates for two bedroom San Francisco rentals with the pace of home price appreciation that we see in San Francisco it becomes a no-brainer for them — if you have the money.
Yes, you’ll need the down payment, but SF real estate is a pretty safe place to park some savings and gives you all of the other intrinsic benefits of owning a slice of the pie in a world-class city like San Francisco.
Now let’s take a look at where people will be buying in 2015.
What’s Hot: Location, Location, Location
The southern half of SF will continue to be hot. The wealth has moved south but Pacific Heights ain’t suffering! Here’s how it looks: Noe and Eureka Valleys now have the largest number of homes for sale in the $2 million plus market, while traditional luxury markets like Pacific Heights still have the highest priced homes.
First time buyers will continue to explore “new to them” but actually long-established residential areas. Young professionals move here and rent in the central core, but when they think about buying, they start to consider outlying neighborhoods. For some, outlying means Bernal Heights, Glen park, or the Sunset. For others, outlying means the Excelsior, Outer Mission, Ingleside and Bayview. If you’re a buyer who wants to stay in SF, just know you CAN get a cute house just a few minutes away.
We Are Number One
According to the recently released Milken Institute report, San Francisco is the number one US city that is driving the future. With our seven hills, abundant cultural offerings, great food, and, yes, beautiful (I didn’t say cheap!) housing, I believe that 2015 is indeed a great time to buy a new home in San Francisco.