John M. Lee: Real Estate Market Review
In recent memory, every time when I reflected back on
the market, I wished that I had purchased more properties
in prior years because real estate prices just keep going
up and up.
Worries about potential real estate bubbles did not materialize
this year. Concerns about the costs of the war affecting
interest rates and housing were non-issues. The feds raising
the short-term interest rates only minimally affected
long-term mortgage rates. Election year status quo fiscal
policies helped stabilize the financial markets and the
lack of job creation did not enter the real estate picture.
This year proved all naysayers wrong - our San Francisco
real estate market did not go down and prices kept going
up and up. We started off the year in a heated market
and continued throughout.
Usually, our market is up the year of a presidential
election and the one after.
There were some concerns that Alan Greenspan would raise
interest rates to keep inflation under check mid-year
and that mortgage rates would rise. Well, Greenspan did
start to raise rates in June and has been raising them
a quarter point at every Federal Reserve meeting since.
However, these increases were well forecast in advance
and the market factored the changes in gradually. When
the increases were officially announced, they were non-events
and long-term mortgage rates did not budge; and in some
Currently, 30-year mortgage rates are hovering at around
6 percent, better than the 6.5 percent to 7 percent that
was predicted by the end of the year. At these rates,
real estate can thrive and do well. Economists are mixed
on interest rate forecasts for 2005, but none are predicting
a large increase.
The only blemish on the economy was the lack of job creation.
It seems like everywhere I went, people were out of jobs
and more were getting laid-off. Real estate prices usually
rise because of a strong economy and job growth. Unless
people have job security, they will oftentimes not commit
to a large long-term debt, such as a mortgage. So why
is our market so strong? Because real estate prices are
a function of supply and demand.
There is very limited supply and large demand in the
City. Approximately 65 percent of residents are renters
and 35 percent owners. Many renters committed to living
in San Francisco for a long time have dreams of home ownership.
But there simply are not enough sellers to satisfy the
demands, causing prices to keep going up.
Also, with low interest rates the cost of home ownership
(after factoring in tax benefits) is not much more expensive
than renting for similar properties. If someone can muster
the down payment or come up with creative financing, they
would be better off owning - taking advantage of tax benefits
while accumulating equity. I recently sold a home for
some clients who purchased it exactly two years ago. They
pocketed $200,000 in profit, tax-free, after paying expenses.
They commented on how they lived for free, with appreciation
taking care of the mortgage and other housing expenses,
and had more money when they moved.
That pretty much summarizes the real estate market for
the past few years.
We have had a good run and with interest rates staying
in the 6 percent to 7 percent range, we do not have enough
supply to satisfy demand, making for what should be another
red hot year in the real estate market.
John M. Lee is one of the top brokers at Pacific Union,
specializing in the Richmond and Sunset districts. For
real estate questions, call him at (415) 447-6231.