Real Estate Cycles

Cycles are present in various aspects of life, with some spanning long periods while others are shorter. These cycles frequently repeat themselves, as observed in phenomena such as the four seasons or economic fluctuations between expansion and recession.

For instance, an economic boom is often succeeded by a downturn due to factors like elevated interest rates, suboptimal business decisions or inflation. Similar cyclical patterns occur in sports and financial markets, where periods of success are eventually followed by declines, and bull markets can shift to bear markets in a relatively short timeframe.

Predicting the exact beginning and end of these cycles is challenging, and their underlying causes may only become clear in retrospect. The real estate market operates within such cycles, encompassing both extended multi-year trends and annual fluctuations.

A common perception is that San Francisco real estate values perpetually rise. However, historical data indicates otherwise. This misconception may stem from the tendency to recall prosperous years or the prevalence of upward trends. Typically, real estate cycles in San Francisco last approximately 10 to 11 years, generally comprising seven years of growth and three to four years of decline. During the upward phase, double-digit appreciation occurs for several consecutive years. Conversely, prices often decrease by 10-15% during downturns. Ideally, the most advantageous investment strategy would involve purchasing property prior to significant appreciations and divesting before the onset of declining years.

The forces driving real estate cycles extend beyond supply and demand. In San Francisco, supply remains constrained as many owners retain their properties, resulting in price movements primarily influenced by demand-side factors. Economic conditions, stock market performance, employment levels and interest rates significantly affect pricing trends. Currently, supply remains limited as many owners secured favorable mortgage terms during periods of low interest rates and are reluctant to relinquish them.

The current cycle has persisted for longer than usual, with prices reaching their lowest point in 2010 and experiencing consistent growth, propelled by low mortgage rates and the technology sector, until 2022. Since then, the market has entered a period characterized by stagnation and mild decline, marking 12 years of appreciation followed by three years of flat or decreasing prices.

Various catalysts have prompted downturns in previous cycles. The 1990 recession resulted from geopolitical events and rising oil prices. The 2000 downturn was associated with the dot-com bust, and the 2010 crisis stemmed from sub-prime lending and inadequate underwriting standards. Recent market flattening can be attributed to higher interest rates, inflation concerns and the impact of the COVID-19 pandemic.

Shorter annual cycles also take place within longer-term trends. At the start of each year, inventory is typically scarce following the holiday season, as sellers are less inclined to list properties during this period. Consequently, available homes tend to sell quickly in January. Inventory usually increases after the Super Bowl weekend, leading to a robust spring selling season and peak sales prices. Activity slows during summer as buyers, sellers and agents take vacations and resumes post-Labor Day until Thanksgiving, after which the cycle repeats annually.

It is important to note that attempting to time the real estate market carries substantial risk. Real estate should be approached as a long-term investment. Historically, property ownership in San Francisco has yielded positive outcomes over time for most investors. If you are ready to venture into this real estate market, it is prudent to consult with qualified real estate professionals, financial planners and tax advisors before making decisions.

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.