Ten Things to Know To Survive the Next San Francisco Housing Bubble
House prices in San Francisco have skyrocketed since the “Great Recession” ended in 2009, yes it ended in 2009! In the meantime the peaks we saw in 2006 have been surpassed and then some, and the prices seem to be continuing on their upward path. It’s not such a long time ago we suffered through the housing crash and the memory for many is still fresh. It is human nature to wonder when the next housing bubble will pop, or at least deflate a bit. This is, understandably, part of every discussion I have with buyers.
Ups and downs are part and parcel of our economy. Generally speaking every 8 years or so we see a peak and a valley of one economic cycle. If this is true we are already deep into the current cycle that started as the recession ended in 2009, and in the next 3-5 years it is reasonable to imagine the economy faltering to some degree again.
That said there are many reasons why the current housing market, while seemingly out of control, may actually be built on a strong foundation. For one, San Francisco’s population is increasing at a strong clip. There have been numerous articles suggesting the San Francisco population will hit one million by some time in the 2030’s including this one in the SF Examiner from December 2013: San Francisco at 1 Million. One million people living in San Francisco! There are about 870,000 residents now according to San Francisco’s listing in Wikipedia, and the demand for San Francisco housing is already intense.
During the recession I saw and learned many things about the real estate market, many perhaps I would have rather not, including tax defaults, bankruptcy, foreclosures, and short sales. I completed my first short sale transaction in 2010, it only took a year to close! It was not pleasant, but I learned a lot about the inner workings of banks and dealing with mountains of paperwork. Subsequently many San Francisco agents began sending me their short sale listings. My closing ratio was in the high 90 percentile while nationwide it was closer to 50%! In 2011 I closed 15 short sale transactions out of 16 I attempted. In Sacramento, where one agent may have had 100 short sale listings at a time my short sale volume may not have seemed high but for San Francisco, 15 short sale transactions was a large number. I was taking care of my regular business as well, so it was a very busy time.
Here are 10 things I learned during the recession that seemed like things that would have been helpful for homeowners and home buyers to know before the recession hit.
10 Things to Know to Survive the San Francisco Housing Bubble
1. Consider How Long You Will Live In San Francisco
When buying a home it is very important to have some sense of how long you intend to live in the home even if only to make a proper risk assessment. The shorter the period of time you plan to own the property the higher the risk. If at all possible plan for the long term. This doesn’t mean you can’t sell in a year, but it does mean not to put yourself in a position where you MUST sell.
2. Location Can Make All The Difference
Even in a downturn the better locations attract the most buyers and the highest sale prices. The more desirable the home the more negotiating power you and your real estate broker will have as well, which can be really helpful if for instance a Rent Back is needed. During the downturn I got the feeling some buyers felt San Francisco property had no value whatsoever. This was simply not true. The nicer better located homes sold quickly and for rather good prices considering the news media made it seem like the housing crash was ushering in the end of the world.
3. Stay In Control Of The “When” Of A Sale
Perhaps you would like to sell in three years, no problem, the strategy is positioning yourself to not HAVE to sell in three years. There is not a person on earth who knows what the real estate market will bring in exactly three years, so setting yourself up to need to sell at any given moment in the future is quite risky. Buying too much house, one that is too difficult to afford, or purchasing a loan with too short a fixed period are usually what forces a person to sell a home at a time that is less than advantageous. When buying a home being conservative is never a bad idea. The key is to always be in control of deciding when to sell.
4. Flipping Houses Can Create Big Returns, But It Is Also Really Risky
During an upswing in the market it seems very attractive to consider flipping homes. Flipping a house means purchasing a home in poor condition, renovating, and then selling all in short order. Since property prices in San Francisco are so high regardless of the condition of the real estate the risks are also very high. Buyers of this type of property often finance them in such a way that all steps must be completed in less than two years. The contractors that take on these projects in San Francisco are pros, and unless you are a pro, or work with pros, it will be hard to compete with them, which may mean you end up purchasing a truly subpar property that won’t attract good buyers even after it is renovated. Every few months I go to a Residential Builders Association meeting. Many contractors specializing in redeveloping single family homes and multi-unit buildings are also there, and it always amazes me how in-tune and informed they are about the business and politics of building in San Francisco.
As an example of what not to do, several years ago I met a contractor when I was getting bids for a bathroom remodel. This contractor was referred by a friend and drove to San Francisco all the way from Sacramento to meet me. During the walk through he told me he had been flipping houses before the housing crash in the Sacramento area, and doing splendidly. He had started with one house, flipped it for a tidy profit, and rolled the proceeds into two other fixer properties. He continued this process over and over again for several years. Finally in late 2007 he had consolidated all his profits and stretched it into a large and expensive fixer house on a beautiful lot with the plan of making a huge profit. The housing bubble popped and as you can guess he lost everything, every dollar he had worked so hard to accumulate. Flipping houses is not for the faint of heart.
5. Work Towards Owning Your House
You never completely own your house till you own it free and clear of any loans. A home owned free of any encumbrances is a truly magnificent asset. It sits on its plot of land protecting you from the elements and if need be the vagaries of the future. That said don’t use your home’s equity like an ATM, or the equity might evaporate when we enter a down cycle. There were plenty of people that had refinanced their homes before the downturn taking equity out as cash, and then found themselves deeply underwater once the housing crash started.
6. Real Estate As A Gamble, or An Investment In The Future
A gamble may create some excellent outcomes but is essentially out of your control. An investment harnesses the power of your skills and labor to create control over your future choices. Make sure you are well informed before making any real estate decision. Find people who truly understand the local market to ensure you are in a position to make decisions that have the most likelihood of being in your favor. Don’t assume any home in San Francisco will appreciate and turn a profit particularly not during every moment you own the house.
I recently helped a client sell their home which they had owned for 8 years. They were recently able to sell their house for almost $800,000 more than their purchase price; that’s $100,000 a year every year they owned it! What blows my mind is that soon after they purchased the house the housing crash started. If they had chosen to sell in those down years they would have lost money.
7. Houses Are Not Liquid Assets
In today’s market it seems like transferring ownership in a property is amazingly easy, but be sure that this is not always the case. It can be very tricky to sell a house in a down market. The important thing is not counting on the equity being their in the exact moment it’s needed. Just because on paper there is $100,000 of equity in a home does not mean it will be accessible in the near term particularly if there are extenuating circumstances such as tenants or property maintenance issues. There are several properties in San Francisco that are not selling right now because of difficult tenant situations. This includes single family homes, which is a type of property people don’t often think of when considering tenant issues.
8. What Type Of Mortgage To Choose
This is a discussion about ARMs (Adjustable Rate Mortgage) with lower interest rates and higher risk or 30 year fixed mortgages with higher interest rates but lower risk. Yes, ARM’s still exist, and many people still choose them even after all the bad publicity during the housing crash. They can actually make sense in some situations, although they do increase the ownership risk of real estate. It isn’t necessarily bad to get a shorter term loan taking advantage of lower interest rates, but a strategy must be in place to offset the risk of having to refinance in a mortgage market with higher interest rates, which is sure to come. A terrible reason to choose an ARM is in order to qualify for a loan. Because ARM’s have lower interest rates the monthly payment is less, so people can chose this type of loan in order to qualify for a mortgage allowing them to buy a particular home that might have otherwise been out of their range. It is much safer to buy a home with a 30 year fixed loan in which the principle is paid in full in the 30 year period. Even better is a 15 year fully amortized loan; the interest paid over the life of the loan is substantially lower, although the monthly payment will be quite a bit higher.
9. Don’t Try To Time The San Francisco Real Estate Market
Predicting a market as complex and as intertwined with outside forces as the San Francisco real estate market is is basically impossible. The latest tech IPO, the earthquake in Japan, rising interest rates are all forces on the periphery effecting our local market. Predicting the San Francisco market is not feasible, so timing the market is not an option. Just because, for instance, the national housing data shows the housing market trending upwards does not mean next month will bring more of the same.
10. Love The Home You Purchase
It doesn’t have to be perfect, and in San Francisco unless you have unlimited funds, compromise is the name of the game, but you have to be able to enjoy your life in your new house. If you don’t like the house you are purchasing it is unlikely many other people will like it when you decide to sell unless, of course, during your ownership you can improve it in such a way that makes it more desirable.
San Francisco is a wonderful place to own property, but it is important to remember markets change and sometimes very quickly. The great thing about our city is people LOVE living here. Even in the darkest days of the housing crash 40 or 50 people showed up to every open house I held for my listings.
With a bit of preparation you can survive the next San Francisco housing bubble.