John M. Lee: Real Estate Market Review

The 2006 real estate year will be remembered as the year that negotiation power between buyers and sellers finally balanced out.

At the end of last year, more properties were sitting on the market taking longer to sell, and although prices were showing year-to-year increases, all the signs were there for a slower market in 2006.

This year started out with not much inventory on the market and properties selling pretty quickly. But, eventually, more listings started going on the market and the summer months were pretty slow. It picked up a little after Labor Day, when more homes than ever were for sale. Most of them have been either sold or taken off the market.

The biggest question in people's minds is: Have prices dropped and by how much?

The most recent reports show some flat pricing trends and some modest price gains in San Francisco. However, what the statistics typically show are the average or median sales prices in an area. So, if a certain type of home sells and others do not, it can skew the true picture.

For example, if the low end market is dead, and more homes in the high end market are selling, then the average and median prices will show a price increase. So what I am more interested in is what the exact same home would have sold for in 2005 versus what it would sell for in 2006.

Unfortunately there are not too many of those examples because someone buying in 2005 typically won't be selling in 2006. However, I was able to come up with a few cases where this actually happened and I think the prices have dropped around 7 to 8 percent in the Richmond and Sunset districts.

Is this bad for the market?

Not necessarily! We have been experiencing double digit appreciation in the market for the last few years, so for buyers who bought in 2004 or before, they might have lost a little equity, but they are ahead of the game because they purchased real estate. For people who bought in 2005, and if they are planning to keep the property for the next five years or longer, prices will be fine and they will realize the appreciation when they sell.

The only people who will lose in our real estate market are those who have to sell right away.

I had some clients who wanted to sell, but could not afford a trade-up property last year. And though they sold at lower prices this year, they were able to buy properties that they could not afford last year. As well, their property tax basis is lower because of the lower sales price and that property's tax basis will stay with them for the rest of the time they own the property. So, all in all, they did well with their real estate investment strategy.

But, because of the slower sales activity, homes with some defects are staying on the market longer and selling at lower prices; while homes that are in a good location and in good condition are still getting multiple offers and selling at relatively high prices.

It seems like buyers are busier than ever and want a home in move-in condition. The number of homes sold this year is down around 15 to 25 percent depending on the neighborhood. If you are buying, it's a better time to buy now than before and there are definitely bargains out there. Some buyers have been able to negotiate deals I have not seen for a while.

Most economists are predicting that interest rates will drop a little next year because the Federal Reserve is afraid of inflation. The fed has engineered our real estate market for a soft landing with its monetary policies and that is exactly what we are experiencing today.

So, where are we going in 2007? The market will chug along at today's pace without much appreciation, prices will be relatively flat and I think it will stay that way for a couple of years before we see more upward movement.

I enjoyed speaking to many of you this year and thank you for reading my column. I hope you all have a great holiday season!

John M. Lee is a top-selling agent at Pacific Union, specializing in the Richmond and Sunset districts. If you have any questions, call him at (415) 447-6231.