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May 20, 2015

What’s Happening in the San Francisco Market?

I was interviewed for a story last week that will be running in Yahoo! Homes. They’ve been noticing some crazy, million-dollar-over-asking sales in San Francisco, and were looking for some idea about why this is happening—and what’s going on with our market in general.

Here’s the upshot: It’s all about tech and foreign money.

Tech employees and foreign investors have been targeting San Francisco properties for a while. But the tech sector is very strong right now, and tech workers are putting their stock option windfalls to work in the real estate market. Foreign buyers—particularly from Asia—are snapping up condos for rental or second home purposes. Given the price of real estate in areas like Singapore, for example, San Francisco seems like a bargain.

This buying activity is at the core of the market here, and there are a few things happening as a result:
Rents are at an all-time high. Tech salaries are generous, so many workers who move to San Francisco can afford the high rents required. These renters don’t necessarily have the down payment for a home, but they’re happy living in an apartment that’s convenient to public transportation, shuttles or the freeways.

Buyers who have the down payment are fleeing high rents. Those who do have at least 20% down are jumping into the market. Because why pay $4,000 a month in rent if you can afford to own a condo?

Cash buyers know that they won’t be getting a discount. Most cash buyers understand that a seller won’t accept an offer with a lower price just because it’s all cash. In extreme multiple-offer situations, there’s usually more than one cash buyer in the mix. So the competition doesn’t go away just because you’re a cash buyer. I’m seeing many cash sales record for well above the comparable sale range. Sellers love sky-high prices without appraisals involved, because they don’t have to worry about the appraisal coming in at value.

Properties purchased with loans or with cash are all in the same comparable sale boat. It doesn’t matter if that cash buyer just paid a price for a home that wouldn’t appraise where there a loan involved. Those sorts of sales become part of the sold data in the MLS—and set new heights for property values.

Developers and contractors are chasing tech and foreign buyers. There are cranes and porta-toilets everywhere you look in San Francisco. And new developments sell out in record time, for well over $1,000/square foot. Similarly, contractors are not shying away from paying competitive prices for fixers that can be transformed into high-end, $5M+ housing for cash-flush buyers.

Interest rates are still low. Interest rates are still making homes very affordable for buyers with loans (e.g., most of the buying population). Many buyers are stretching a bit just to get into the market, and taking advantage of the low rates.

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