John M. Lee: Where Are Real Estate Prices Going?

There are real estate prices going? How's the market? Should I buy or sell now or later?

These are the pressing real estate questions being asked each and every day by my clients lately. As everyone knows, we have been in an up market since 1995 and have had double-digit appreciation each year for the past three years.

But just like the stock market, prices cannot go up forever. Because prices were appreciating so fast, income cannot keep up for average buyers to afford these prices indefinitely. The stock market helped until it started crashing.

Because real estate is a lagging indicator (meaning that it follows the other economic indicators), it will be the last area to be affected. It tends to lad the stock market by 9-12 months. So we are starting to feel the effects and the media has been reporting doom and gloom for the housing market. But is it really true?

Fortunately for us in the Richmond and Sunset districts, our real estate market is still doing fine, even though it has slowed. Instead of 10 offers on every listing like we had at this time last year, we might get three. But, practically speaking, all we need is one good offer.

In certain areas of the City, like the South of Market and Noe Valley, prices have been affected more by the economic slow down. Buyers in those areas tend to be younger and many of them worked in the high-tech and dot-com industries. With the melt-down in many of those industries, many potential home buyers who work in these fields are deciding that their future is too uncertain to be buying at this time.

In contrast, many owners, especially those who have been laid off, are making the decision to sell. Once again, the simple economic law of supply and demand applies ­ when there is more supply and less demand, prices decrease.

In the Richmond and Sunset districts, the buyer and seller pool tends to be more stable because residents work in a variety of professions. Thus we do not get the extreme up and downs that other parts of the City get.

Currently, if a property shows well and is priced attractively, it will still receive quite a bit of attention and a few will go for over the asking price. In fact, more than 50 percent of properties listed are going for more than their asking price.

In terms of prices, we have leveled off in terms of appreciation so prices are not going up by 20 percent a year as we have experience during the last few years. We are not seeing crazy bidding wars, but properties are still selling.

What does this mean? Most people are comparing this market to our last peak in 1989 and trying to correlate it to mean we will be heading down for the next few years. However, there are major differences between the economy 11 years ago and today.

The mortgage interest rates were hovering around 10 percent in 1989 versus about seven percent today, a substantial difference. Our economy was headed into a recession then, whereas we might have one or two down quarters this time around. Most experts feel that we are in an inventory adjustment period rather than a recession. The Federal Reserve Bank is finally cutting rates aggressively to ensure that we do not go into a recession. There is a large tax cut being proposed by President George Bush and even Democrats are proposing some sort of tax cut. All these actions will result in more available cash being pumped back into the economy.

Most economists expect the economy to bounce back in the second half of the year. The stock market appears to have found a bottom and is poised to go up again. With a little luck, real estate might be able to escape some serious damage this time around.

If you are thinking about buying or selling, this type of transition market will present many golden opportunities.

John M. Lee is a top-selling broker at Pacific Union. For questions concerning real estate, call him at 447-6231 or e-mail isellsf@aol.com.