John M. Lee: The Real Estate Year in Review

The real estate market in 2002 was extremely interesting. The year started with a bang, but prices peaked in the second quarter and proceeded to drop about four to five percent the rest of the year.

The Sunset Home Sales Comparison Table shows the final results for 2002 as compared with prior years. The data was gathered from the San Francisco Association of Realtors' Multiple Listing Service and consists of single-family home sales in the Sunset, Parkside and Golden Gate Heights areas.

In 2002, there were 588 sales versus 480 for 2001 and 573 for 2000, an increase of 23 percent from 2001 and 3 percent from 2000. Why are sale activities up so much? I believe that the events from the Sept. 11, 2001 World Trade Center bombings stalled the real estate market at the end of 2001. So at the beginning of 2002, there was a strong pent-up demand - plus prices were down eight - 10 percent from their peak in 2001, leading buyers to start buying at the beginning of the year.

Also, interest rates were declining to 30 - 40 year lows, making homes more affordable for many people. As a result, homes sold at a brisk pace the first half of the year. Throughout the first half of 2002 it seems that if a property was in good condition and priced right, it sold within a matter of days, most often with multiple offers and selling above the asking price.

In the second half of the year, homes took slightly longer to sell, especially if there was any type of defect in the property. Prices did decline a little bit as the economy remained weak and was taking a little longer than expected to pick up. Also, the threat of war and corporate scandals dominated the economic news, leading to stalled action on many buyers' plans.

The amount of marketing time needed to sell a home decreased to 27 days in 2002, versus 30 days in 2001 and 25 days in 2000, a decrease of three days or nine percent from 2001 and an increase of two days or eight percent from 2000. What is amazing about this statistic is that the "day on market" number includes the escrow period. This means that homes were selling in a matter of days.

Even though the annual median price comparison shows an eight percent increase year over year, a more careful analysis shows that all of the appreciation occurred in the first two quarters of the year and that prices actually decreased in the last half of the year.

What is in store for 2003?

Most economists are calling for more of the same in the first half of the year with growth resuming in the second half.

Real estate has held up the rest of the economy. Most people are surprised at how well the industry is doing. But I think the underlying factor is that home ownership is still a high priority with most people and with prices declining towards the end of 2001 and interest rates declining, purchasing a home became much more affordable, which caused consumers to buy rather than rent. I believe that if interest rates stay low, and all indications from the Federal Reserve Bank is pointing that way, we should start off 2003 with a pretty strong real estate market.

Another trend that has been occurring is a higher rate of foreclosures. The economy is still not doing well - the unemployment rate is still high; some people have refinanced to a point where their mortgages are higher than their home's actual market values - leading to banks taking back some properties.

Our hope in the real estate industry is that we do not see the wave of foreclosures that we saw between 1992-1994. During that recession, banks foreclosed on properties and then sold them off at fire-sale prices, further depressing real estate values. There is a slight possibility that this can occur, but with the low interest rate and President George Bush finally putting pressure on to boost the economy, I believe the real estate market will be fine in years to come.

My prediction for 2003 is that we will have a good real estate market with a shortage of good inventory and moderate appreciation. If you are contemplating buying or selling a property, 2003 will probably be a good year to do so.

John M. Lee is a top-selling broker at Pacific Union's California Street office. If you have any questions regarding real estate, call him at (415) 447-6231 or e-mail him at johnlee@isellsf.com.