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Real Estate Investor

Real estate guesses, guestimates and estimates

Housing prices reach new highs.” “No end in sight for price appreciation.” “Prices are moderating.” “Market crash imminent.” “Prices continue their rise.” What can you believe?

You could have read about it in numerous places, including the pages of Marina Times. Remember? Even though San Francisco median home prices had hit record highs, the price appreciation was moderating. The length of time homes were on the market was expanding. Then a couple months later, you see that prices have hit yet another record high.

Or perhaps you heard it from talking to your real estate agent friend at the coffee shop. Perhaps another friend of yours has been watching the market for many months, ready to jump in to buy a new place, and is certain she knows what’s going to happen next.

Whether you are a buyer trying to determine your cost to own in this city or you are a seller trying to get the best price for your property, you want to know what you can expect on the market. Set your price too high and your home will sit on the market for longer. (Or, perhaps a lesser concern for you but not your neighbors, is that you’ll accept a sale price below listing price, which is one of the many statistics researchers use to tell if a market is softening or strengthening.) Or pay too much for your new home, only to watch comparable prices slide over the ensuing months as your new neighbors got better deals than you did and they save hundreds of thousands of dollars.

A caveat that we have repeated here several times and will do so again is that when the housing inventory is low, you might not have enough data to calculate a reliable average or median price. San Francisco, taken as a whole city, has a notoriously low inventory of available homes and condominiums on the market. Neighborhoods within the city compound the problem. For example, Zephyrsf.com gives the median price of Cow Hollow homes as $3.54 million, which it reports is a 60.9 percent increase over the past 90 days. Cow Hollow homes can be expensive, but their sales prices are not shooting up by 60 percent in three months. A small number of big sales skew the curve; in this case, it was a mere few sales that took place in that neighborhood.

So a snapshot in time is all we can provide, but it can be worth looking at. Paragon Real Estate Group provides some good reporting on market activity in the area, and if you look at its report for the third quarter of 2014, you see that things still appear to be going gangbusters. (You can find this and more research at paragon-re.com.) Though it does show a slight fall for median house sales prices for the third quarter (to $1.05 million from $1.1 million), “this is due mostly to seasonality issues,” something it says is common to third quarters. Meanwhile, condo prices held steady (at $950,000) for three straight quarters.

For the area covered by Cow Hollow, the Marina, Pacific Heights, and Presidio Heights, there were 119 house sales for the previous 12 months, with a median price for the previous six-month period of $4 million. By the way, there is much more activity — with hundreds more sales — in other neighborhoods such as Noe Valley, Glen Park, Golden Gate Heights, Bayview, and Excelsior. The current champion district in terms of volume of sales is the South Beach/SoMa/Mission Bay area, which had 25 percent of the city’s sales; Paragon explains that this is because it is “virtually the only place where high-rise, high-density projects can be built in the city.”

Extrapolating from that to your own buy/sell decision is tricky, and a lot of people end up trying to guess if the market trend is likely to continue and, if so, for how long. Here is a good way to know when people are either trying to pull the wool over your eyes or they’re not too smart: They tell you we’re in totally uncharted territory, where the rules have changed and the law of supply and demand doesn’t apply any more.

If that sounds familiar, that is because it is what promoters of “the new economy” tried to peddle during the first dot-com bubble. Share prices of tech companies were wildly inflated; their CEOs and the venture capital firms behind them said not to worry about the nonexistent profits or even no foreseeable profits — the old rules don’t apply. But the old rules did and do apply, and the bubble popped.

Paragon notes that “over the past 30-plus years, the period between a recovery beginning and a bubble popping has been about six years. Periods of market recession have usually lasted about four years. After a new recovery begins, previous peak values are typically re-attained in about two years. Whether future housing markets repeat these cycles and time frames is unknown.”

You can try to apply that to your decision-making, but it would be wise to add fundamental factors, as well, that apply regardless of cycle timing. How valuable is someone likely to see the property as being at any time, based on its location, neighborhood, size, quality of building materials, amenities, and the number of neighbors with derelict cars on cinder blocks in their backyards?

I have known many successful real estate investors through the years and across the country, and ranging from owners of a four-unit apartment building to people who ran giant publicly traded real estate investment trusts. They differ in countless ways, including gender, age, ethnicity, length of time as investors, political persuasion, sexual orientation, religion, and much more. But the one thing they have in common is that they are very serious about estimating value of properties and their return on investments. The quickest way for them to conclude you were either an idiot or a fraudster would be for you to tell them not to pay attention to market trends, historical performance, interest rates, ROI, and other details and instead invest based on a belief that the sky’s the limit, that the old rules don’t apply. The old rules might seem to stretch at times, but they still hold.

The best advice is to get as much information as you can and don’t make precipitous moves. Glean what you can from the snapshots in time from the various market reports available (and there are many good ones out there; start by Googling “San Francisco real estate market trends”). But also talk to your friend the agent, and question your friend who’s trying to buy about what specifics she’s considering in her price range. And look at a zillion properties online and in person. It will help put things into perspective, and it’s fun.

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John Zipperer is the former senior editor of Apartment Finance Today and Affordable Housing Finance. E-mail: [email protected].

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