John M. Lee: Ideas for a Real Estate Blog

I was thinking this month that it might be fun to start a real estate blog on the Internet and just put down my thoughts regarding real estate. Then I decided I should try it here first to see how it would work. So, here are some thoughts:

Prices are too high
You might think that this is a good problem for sellers to have. But, this is a real problem that many potential sellers have.

For example, they may have purchased their homes four to five years ago, in the $500,000 range, but now have outgrown them, maybe because they have a couple more kids or just need more space. Their house is now worth about $1 million, but, unfortunately, their trade-up home in San Francisco will be around $1.5 million.

The problem is that they are a working couple, putting all their income into the mortgage, private school tuitions, and improving their lifestyles the last few years. Their salaries have not kept up with home prices, and they have not been able to save because of the high cost of living in the area. So, if they were to buy, they would be facing an additional $500,000 worth of mortgage, plus the incremental rise in property taxes based on another $1 million of assessed value, resulting in approximately $4,000 more per month to make the house and property tax payments.

As well, they would have to make about $120,000 more per year than they did when they purchased their original house to qualify for a loan on the new home.

When confronted with numbers like that, sellers either move out of the area or implement other options, such as adding some rooms in the basement or expanding the property to accommodate their living needs. The net effect of these factors has been to limit the supply of homes on the market. Because of the lack of inventory, the prices of homes keep going up.

Homes versus condos
There was a time when homes appreciated much faster than condominiums. But, with the acceptance of condos in San Francisco, appreciation at times has exceeded that of single-family homes. But what is going to happen in the future? Should you buy a house or a condo if you are concerned about appreciation?

Let's put it this way: Contractors are not building any more single-family homes!

The economics are not there for builders to build single-family homes, so when an old home gets torn down, usually condos take its place.

Also, there is massive construction of condos in the SOMA and Mission Bay neighborhoods. So, there is an ever increasing supply of condos and diminishing supply of single-family homes. Based on the simple economic theory of supply and demand, single-family homes should go up in value much more than condos in the future.

Real estate bubble?
Even though the real estate market has slowed somewhat from previous years, the market is still extremely active. Properties that are in good condition and priced well are still receiving multiple offers and selling at high prices. Properties that have some type of defect or are priced high are still sitting on the market.

We expect this same trend to continue in the second half of the year. With a lack of supply and plenty of demand, I just do not see any real estate bubbles on the horizon.

If you have any questions about real estate, call John M. Lee at (415) 447-6231 or e-mail johnlee@isellsf.com.