TitleDecember 2004


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 cases decreased.

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.