How Hot Is The Real Estate Market? Example Of A 30% Overbid
Remember the $1.69 million three bedroom, two bathroom condo I used as an example in “How To Correctly Value And Analyze Property“? I forecast it would go for $1.85 million. 2553 Greenwich has a fantastic view of the Bay, but it doesn’t have a dedicated entrance, and it’s on three floors after walking up a flight of stairs.
I figured the property could easily reach $1,000/sqft in several years, or $2 million due to the view and upward trajectory of the SF real estate market. It turns out my estimate of $1.85 million was just wishful thinking of what I’d like to pay. A friend’s friend bid $2 million for the place cash and LOST! Just think about that for a minute. Someone was willing to pony up $300,000 above asking and still got a big fat rejection!
The only people who have $2 million cash liquid are those with net worths of at least $5 million if not much, much more. Of course someone with “only” a $2-3 million net worth fully invested in the stock market could just liquidate instead, but that’s highly unlikely. The multi-millionaires I know coincidentally follow two main Financial Samurai rules: 1) They don’t spend more than 1/10th of their gross income on cars, and 2) No one asset class makes up more than 50% of their net worth. They are highly diversified.
It turns out that 2533 Greenwich Street received 8 offers with the winner paying $2.2 million cash! That’s $501,000 over asking, or roughly 28%! How does one even come up with a $2.2 million valuation anyway? It’s like shooting into the dark as you don’t know what other people are doing. This is a classic case where underpricing brings maximum value.
$2.2 million is mind blowing due to the hodgepodge nature of the property. It could be completely done up, but without a dedicated entrance and no connection from the garage into the condo for security purposes, it just feels a little off. And with all those stairs starting from the street level, it really should have an elevator. Regardless of my opinion, more than five people thought the property was worth more than $2 million bucks so that’s all that matters.
PROPERTY MARKET TAKEAWAYS
* Cash buyers are everywhere. The amount of all cash offers in the market is increasing. Some peg the amount at 30%. Cash will always trump another buyer who has to take out a loan.
* International buyers are here. One of the reasons why you want to invest in a major city is because of the international demand curve that city faces. The buyers of the next decade are from Mainland China just like how the Japanese were the buyers of US assets in the 80′s and 90′s. They are buying properties in cash for themselves and for their children. Part of the reason is because they want to diversify their riches away from China. Another reason is the steady appreciation of the Ren Min Bi which is making foreign assets more attractive.
* Focus on prime property. Lower tier property may have risen more in percentage terms, but they also fell way more as well. Think of prime property at the top of a triangle that keeps on growing in height and width. The growth is in demand of limited prime property, resulting in continued price growth. What seems ridiculously expensive now will seems even more ridiculously expensive 20 years from now.
* It feels crazier now than during the peak. I distinctly remember getting outbid on several properties between 2004-2007. It now seems worse because there’s 40% less inventory at any given day plus 5 years of pent up demand. Some properties have breached peak prices, but still many have not, especially in outer areas and vacation spots. There is still lots of opportunity if the entire tide is going to lift all properties to new highs. You’ve just got to spend the time to look if you can’t afford prime areas or if you’re looking for that second home.
TIME FOR A PROPERTY MARKET COOL DOWN
With the 10 year yield spiking to 2.7%, there will inevitably be a slowdown in the property market. A 1% increase on a $500,000 mortgage is an extra $420 a month in interest. Rates are still extremely low by historical standards, but everything is relative and buyers will need time to adjust. If you’re a cash buyer then you’re loving the marginal decline in competition.
How much will the property market slow down is hard to say. The stock market had a 3% correction but then bounced right back to all time highs. I suspect something similar will happen in the property market as buyers take higher interest rates to be a signal for a strong economy.
It’s a little absurd why there are so many buyers now compared to just a couple years ago or even just in 2012 when prices and rates were lower. I don’t think we are in a property market bubble for the nation as we are coming off a low base. Pent up demand is real and only growing with such limited supply.
We’ll see what the future holds. My bet is that nationwide prices moderate to around 5%-7% YoY median price increases for the next couple years (from 12%). As for San Francisco, I fear a Twitter and AirBnB IPO is going to make things even more unaffordable. Obviously there are properties on the market that sell for under asking or don’t sell at all. But for those properties I would be willing to own, everybody will want to own them as well. Focus on the good stuff folks!
The easiest and best way to check the sales prices of comparable homes is to punch in your desired property on Zillow.com. You can see sales history and home value estimates to get a ball park figure of the properties’ worth. From there you’ve got to do your own calculations on mortgage cost, rental yields, and so forth to get a best guesstimate on value.
* Make sure you refinance your mortgage. If you haven’t refinanced your mortgage in the past 6-12 months, I strongly suggest you at least check the latest rates online with Quicken Loans, the largest online mortgage retailer. Rates have been ticking up in 2013 and could surge higher with the end of Quantitative Easing. They were founded by Dan Gilbert, also owner of the Cleveland Cavaliers. Because they have the largest online network, they can provide the lowest rates. They also seem more streamlined in the refinancing process than traditional bricks and mortar banks as well. Interest rates are at all time lows and won’t stay this low forever. My latest refinance was for a 5/1 jumbo ARM at 2.625% from 3.125%. Might as well check because it’s free and there’s no obligation.
* Check Your Credit Score: Take a moment to check your free credit score through GoFreeCredit.com, a company I trust. 30% of credit reports have errors, which could put a serious hamper on your refinancing or new loan borrowing abilities. I had a $8 late payment I didn’t even know I owed crush my score by 100 points come up during my last refinance! If you don’t want the credit monitoring service, simply cancel before the grace period is up.
* Get the best home insurance possible. In order for your property to grow in value you must protect your property from damage. Fires, floods, leaks, theft, and other accidents happen all the time. If you have cut-rate insurance, you could very well pay way more than you should. I highly recommend checking with USInsurance.com online to find the best home insurance rates. They have a huge network of providers that will compete against each other to provide the most tailored home insurance coverage possible that is affordable. Mobile home insurance, renters insurance, condo insurance, and homeowners insurance are just a few of the options based on the type of home in which you reside. Leverage the internet to save money and protect your largest asset.