The Right Time to Buy?

This is the question I get asked almost every day: “Is this the right time to buy real estate?” People ask this for several reasons depending on who they are.

Are they a first-time home buyer looking to move into their first home? Are they a trade up buyer looking for something larger and better? Are they investors wanting real estate income? Everyone is looking to make the right decision.

Another comment I often get is: “Why is San Francisco real estate so expensive? I don’t know if I will ever be able to afford a home here. Are you sure that this is a good investment?”

In order to answer these questions, let’s review the recent market to see where we are in the real estate cycle. My frequent readers can tell you that our real estate cycles are about 10 to 12 years long, with about seven years up and four years down to flat. We hit a low point in our cycle in 2010, and went up until about 2022, after COVID-19, and then we saw a drop. Now our prices have stabilized.

The most important factor that affected this cycle was the mortgage rate. We were at approximately 5% in 2010 and, through a series of fluctuations, went to about 2.75% at its low in 2022. There was one last big push in the market in the spring of 2022 before the rates went up to about 7.5% by the end of 2023.

Needless to say, this decreased the number of buyers in the marketplace and led to a slowdown from which we are recovering. We are currently two years into this down phase of the cycle and the interest rate is starting to decline. It is currently at about 6.5%. What has saved this market from plummeting any further is the “lock in” effect. That is, the buyers who purchased the last few years and owners who refinanced to the lower interest rates the last few years are deciding not to put their properties on the market, thus limiting our listing supply.

During the last down cycle, we also had the mortgage crisis where there were a lot of foreclosures. That added to the glut of homes on the market, fueling a downward spiral on prices. The lenders responded by tightening up underwriting guidelines to fix that problem. Although there are some foreclosures hitting the market, there have not been many, and these properties are mostly owned by well-funded entities and not banks that do not have federal oversight and do not have to unload properties at low prices. This helps to keep our real estate market prices stable.

When the interest rates were increasing, buyers were priced out of the market and also were sticker-shocked to see how much their projected monthly payments were rising. But since peaking, buyers have adjusted to the payments and prices, and have recalibrated their expectations.

If you had asked me a couple of years ago if that was the right time to buy, I would have said be careful because we were heading into an uncertain market. We were at the end of the cycle and interest rates were rising. Some still purchased because of a need to live somewhere and were still able to get into the market at lower interest rates.

Currently, we are in the flat part of the down cycle and with interest rates projected to decrease, the dangerous period is over. With the Democrats trying to win the November presidential election, they will do all they can to keep the economy going strong.

Also in most cycles, San Francisco has led the other surrounding areas in terms of pricing. But this time around, because of COVID-19, people are moving to less-dense areas, meaning out of the City. And with the availability of remote work, many employees do not have to commute every day and can manage from the suburbs. Prices in other areas have gone up faster than San Francisco of late, so you will probably see a rotation in the market where our prices will catch up.

What is the downside of buying now? The short answer is that prices will go down some more. Nobody can predict 100% accurately on pricing; however, prices have dropped from the peak already and seem to be stable at the moment. Real estate is a long-term investment, the worst you can do if you pay your monthly mortgage is that you will own your home free and clear after 30 years. And if rates were to decrease, you can always refinance to get a better rate. Now that is not a bad situation to be in.

So, if you are considering investing at this time, I would recommend evaluating everything carefully. If the right opportunity comes up, you should act on it!

John M. Lee is a broker with Compass specializing in the Richmond and Sunset districts. If you have any real estate questions, call him at 415-465-0505 or email johnlee@isellsf.com.