John M. Lee: Real Estate Year in Review

We have had a long up-run in the real estate market since 1996 with one minor hiccup along the way for one quarter after the World Trade Center bombing in 2001. Other than that, the real estate market, fueled by low interest rates, has been red hot. We might have reached the end of this up-trend in 2005.

The real estate market started 2005 with a bang. With not much inventory on the market and buyers out looking, not even the Alan Greenspan-engineered interest rate hikes affected the market. Multiple offers were rampant and prices were going higher and higher.

The long-term mortgage rates proved to be more stubborn and did not move much even though the Federal Reserve Bank was raising the short term rate a quarter-point at every meeting. There was so much foreign money flowing into our economy that the long-term yields were not affected; thus, mortgage rates remained under 6 percent throughout most of the year.

Also, during the year, many people were turning to interest-only mortgage loans to get into the real estate market to buy the largest home they could afford. We had the typical good spring market where everything was selling for over the asking price.

Worries of real estate bubbles were all over the national news. But it was interesting that many of the knowledgeable economists did not identify San Francisco as an area that was over-valued. In fact, some even went as far as classifying us as a world class city and said our real estate was a good value when compared to cities such as London, Paris, Hong Kong and Tokyo. The summer months brought a hint of a slow down as properties sat on the market for a bit longer. And instead of 10-plus offers on a listing, we might get five or so, still quite sufficient to sell homes above asking prices.

Around August, the trend changed. The market slowed considerably, and then after Labor Day there was an explosion in listing inventory. All of a sudden, we had about a three months supply of homes for sale instead of the roughly one month that we have experienced for the past few years. Some homes were actually sitting on the market not receiving any offers. It has become more of a balanced and normal market for buyers and sellers and has been that way since.

Sellers and agents have been complaining that homes are taking too long to sell. But most people only remember the recent torrid seller's market that they have forgotten what a normal market feels like. Homes typically stay on the market for about 30 days or so, and there are negotiations between buyers and sellers. This is normal and we are likely to be seeing more and more of this scenario in the new year.

What is 2006 going to be like in real estate? I believe that if interest rates stay under 7 percent, our market should be fine. Prices will not increase by double digits like in the past few years, but will be relatively flat for a while. This will provide buyers opportunities to buy at their pace, while allowing sellers to realize their gains.

The question on everyone's minds is: Will prices drop? I think we will reach an equilibrium on prices in 2006. We might not be able to get the peak prices attained in the spring of 2005, with prices being flat.

That pretty much summarizes the real estate market for 2005. We have had a great long run, and will be in a flat period for the short term. I will have a complete pricing analysis for you in January.

Thanks for a great year and I hope all of you have a wonderful holiday season.

John M. Lee recently was elected to the Board of Directors of the SF Association of Realtors and specializes in the Richmond and Sunset districts. For real estate questions, call him at (415) 447-6231.