IN THE KNOW, JAN 10, 2016

Time for a Sweet 16?

What will the market be like in 2016? Will turmoil made in China impact Bay Area real estate?

THESE are the questions we keep getting these days. The answer we give is that it’s still going to be busy and prices will still be strong. Annual figures and continuing trends show that San Francisco’s real estate market will be marked by low inventory, high demand and fast escrows; prices may not be growing as fast as they have over the past 4 years but they should continue to outpace inflation.  And while we’ve said it before, the following factors continue to suggest San Francisco’s real estate market will remain strong with moderating growth and real property holding value.

It looks Chinese to me. China’s stock markets dropped precipitously last week and are attention-grabbing for sure but are contained to, well, China. The last time we checked our retirement funds we never saw a single-Chinese company traded in Shanghai being in the portfolio. This is, in part, due to the fact the Chinese stock market is a bit of a fiction if you really think about it. While all markets have a bit of fiction in them (value is, after all, in the eye of the willing buyer) many of the companies listed on the Chinese stock market are indirectly owned by the government or are derivative of countless state-owned enterprises (i.e., non-vetted paper companies). But when viewed in the context of China’s continuing relaxation of capital export controls, the real impact of Chinese financial and economic instability may be an accelerated push by Chinese companies and individuals to send their money overseas so as to diversify their wealth into non-Chinese assets such as foreign real estate.
I got mine and I’ll hold on to it. A lot of the property that was sold over the past few years was bought all-cash or with extremely affordable mortgage rates that are barely above inflation rates. These benign purchase methods keep down carrying costs, which are locked by fixed mortgages and by Prop 13’s restriction on property tax rates. Because holding a property poses little risk to an owner and because property has usefulness not only as someone’s home but also as a rental, properties that have traded over the past few years may be locked up for a lot longer than they would otherwise.
Let me get mine now while I can. We’ve made this point before that there may be a lot of buyers who want to act quickly to lock-in mortgage interest rates for 30 years before rates get too high. While the Fed won’t move rates up to astronomical levels any time soon there’s still an undercurrent that low mortgage rates won’t last forever. So, you’d better get something now even if that means you’re paying a little more for a property in today’s dollars if it means you end up with the property over the long term.
It’s still tough to build in San Francisco. Because of highly restricted development regulations and complex building requirements will still mean that new inventory will still be hard to come by. And, this doesn’t’ even consider the question if you’d even want to live in a new high-rise!
Real stallions vs. unicorns. There’s been much ballyhooed about declining IPO valuations and softening exuberance for the City’s tech sector. While tech jobs make up about 8% of all jobs in the City there are other industries here after all. Even within the startup/tech sector there are a stallion of solid, banal, ho-hum companies that continue to be part of the steady transition away from an analog/paper society to a digital/paperless society. Some of the sectors that help the area chug along are bio-tech, robotics, automation (e.g., self-driving cars), better apps and hardware, etc. It’s a jeannie that can’t be put back in the bottle.
Even if the market chills where prices actually go lower over a sustained period of time,  chill in the air will mean better affordability. Don’t forget that slower price growth will nevertheless encourage buying — especially if prices hold steady or grow slower. Folks who were priced out of real estate or were otherwise holding out on buying may now finally wade into real estate.

Subscribers of our Newsletter also got to read:

  • Stories of the Week: find out what really happened behind the sales that got into contract recently
  • (Secret?) Off-Market Listings: see which ones are new this week as there are lot of new ones; and,
  • News Stories of the week

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