John M. Lee: The Future of Real Estate

I was just reading the August issue of Money Magazine with the headline: "The Best Places for your Money Now -Why Real Estate is Over" and have to comment on the story and where I think real estate is going.

The story discusses how the economy is getting stronger, with the stock market on the rise, and discusses the best places to invest your money. It talks about how home prices have risen considerably faster than inflation in recent years and attributes the rise to a sharp drop in interest rates.

All this makes sense thus far. And then the article goes on to give some general advice regarding real estate, including:

• "Buy the home you want - after all, your primary return comes from living in it -but this is not the time to strain to buy more house than you need."

I believe that this is true all the time, not only during the next few years.

Most buyers in the Bay Area are stretching just to purchase the home that meets their minimum standards and expectations. Most cannot afford to buy their dream home and have to make huge sacrifices concerning what they want to get into the real estate market.

• "While real estate investment trusts (REITs) and other real estate securities can be valuable diversification tools, now is not the time to be adding such investments to your portfolio."

I agree with this statement because you lose control in REIT investments. The only decision you can make is whether or not to buy or sell. As well, the buyer cannot be involved in property acquisition decisions and in the day-to-day operations of the properties. Thus, you are entrusting others to make the correct decisions. Most of these properties are out of the Bay Area so I personally do not like to be involved in REITs.

• "Recognize that the first sign of a slump in real estate is a drop in volume."

Volume just has not decreased in San Francisco yet. If anything, we still do not have enough inventory and multiple offers are coming in with sales more than the asking price the norm, rather than the exception.

• "If you don't already own a home, be cagey. At some point you'll get a chance to scoop up bargains in REITs and similar picks."

This is the reason why I do not participate in REITs. They might sell during a bad market because they have to, thus lowering the chance for profit. I believe that the next few years will not see the high appreciation rates we have seen in the past few years. However, I do not believe that a substantial decline is before us.

Alan Greenspan's strategy for real estate for the past few years has been to cut interest rates to stimulate and sustain the real estate market so the overall economy can survive and prosper. Then, when the economy comes back like it is currently doing, increase interest rates to slow down possible inflation and hope that the stronger economy and job creation will be enough to sustain the real estate prices.

Thus far, even with the quarter-point increase in the Fed Funds rate on June 30, mortgage interest rates stayed the same, and even decreased among some lenders. This shows that Greenspan's plan is working thus far. And my hope is that Greenspan can bring the real estate market to a soft landing with his monetary policies.

So what should you do as a buyer? I believe that our prices have stabilized and even if the interest rates should go up gradually, our prices should remain steady. We still have a large buyer pool with not enough properties to buy. Thus, the forces of economics predict that there should be upward movement in prices, though not as fast as in the past.

For sellers, it is still a great time to sell. Prices still are high as compared with past years.

San Francisco is a special place to live and to own properties. All our land is built-out and vacant lots are scarce. With limited supply and steady demand, real estate prices will go up, even if there are some bumps along the way.

John M. Lee is a real estate broker in San Francisco specializing in the Richmond and Sunset districts. If you have any questions, please call him at (415) 447-6231 or e-mail at johnlee@isellsf.com.