John M. Lee: Real Estate Market in Review

The 2007 real estate year will be remembered for the subprime mortgage meltdown and dealing with the aftermath results.

In San Francisco, we have been fortunate in that we have not experienced the effects as dramatically as in outlying areas. This year actually started off pretty good with not much inventory on the market and properties garnering multiple offers in the spring. The San Francisco market started to slow in the summer and properties for sale started to increase.

Currently, the market is in its normal holiday cycle, with fewer properties on the market and fewer buyers looking to purchase.

The peak of the last real estate cycle actually occurred in 2005, with 2006 being a transition year with lower numbers of sales but higher average and median sales prices. When the San Francisco numbers for 2007 are finally in, you will probably see about a 15 to 20 percent decrease in the total number of sales, and a very small increase in prices.

So what happened this year? The year started with enthusiasm as it always does. There was some pent-up demand from 2006 and not enough inventory to satisfy it, so early in the year people were competing for the same inventory, resulting in multiple offers and higher asking prices.

But, even though all the markets around us were falling apart because of the subprime mortgage problem, it did not seem to affect our market.

Subprime mortgages are loans taken out by borrowers who oftentimes do not have stellar credit. They are made at higher interest rates to people who can not qualify for the best loan rates. When interest rates adjust upward, or when the economy turns downward, or when the borrowers loses his or her job, or if property values go down, the risk for default on these loans becomes much higher.

In the past few years, there were many lenders who specialized in these types of loans. Because credit was easy to obtain, buyers took the loans, which helped drive the market upward.

Fortunately for San Francisco, most of the loans were in the lower-priced surrounding areas, so defaults have not hurt San Francisco as hard as other locales. The same story rang true everywhere - the priciest markets were not affected as much as the first-time homebuyer's market.

It seemed like the economy was doing OK and the people with money still had money and were making more money, so the high-end market was booming and that is what is helping boost average and median prices for 2007. The market started to slow in the summer, a trend that has been continuing since then. But the market has not stopped.

Properties in nice areas and in good condition are still in great demand, oftentimes selling with multiple offers and higher than asking prices. The ones that do not sell are either in poor locations or have some other defects. Those properties linger on the market, with some eventually being sold at reduced prices or being pulled off the market.

What is in store for 2008? We are in the second year of our down to flat real estate cycle. Generally, in years past our down cycles would last about four to five years with price depreciation being the largest during the first two to three years and then going flat for the remainder of the term.

Logically, this makes sense as the market is currently working through the problem homes funded with subprime loans. Homeowners who want to sell but who can afford to hold onto their homes are just doing that, waiting until prices get better before selling. After the homes with subprime issues go away, prices will go up rapidly again to the prices of a few years ago.

So, I think 2008 will be a flat or slightly down year for prices. This will present some nice buying opportunities for people who have been sitting on the sidelines. The market is not as bad as the early '90s, when we were heading into a recession, and I don't believe it will get that bad.

The interest rate is still fairly low and we have a presidential election year, so our incumbent president will do all he can to keep our economy strong, including efforts to revitalize our real estate market.

I enjoyed speaking to many of you this year and thank you for reading my column and supporting my business. Best wishes for a great holiday season and a prosperous 2008!

John M. Lee is an agent at Pacific Union, specializing in the Richmond and Sunset districts. If you have any questions, call him at (415) 447-6231 or e-mail johnlee@isellsf.com.