How Hot Is The Real Estate Market? Example Of A 30% Overbid

how hot is the real estate market

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.

Large Open Living Room With Views Of The Bay

Large Open Living Room With Views Of The Bay

$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.

Spacious patio with Golden Gate Bridge Views

Spacious patio with Golden Gate Bridge Views

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.

RECOMMENDATIONS:

* 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. Find out what your credit score is before applying so you don’t waste time.

* 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.

* Refinance Your Mortgage. LendingTree Mortgage Refinance offers some of the lowest refinance rates because they have a huge network of lenders to provide mortgage loans, home equity loans, and home equity lines of credit. If you’re looking to buy a new home, consider using LendingTree to get multiple offer comparisons in a matter of minutes. When banks compete, you win.

Updated: 4/26/2014

Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    That building sure doesn’t look like much from the outside. I would never think there was a $2.2mil unit in there! Especially with that weird entrance that’s through the neighbor’s gate. That’s just weird. It’s crazy that the winning bid was $501k over asking. That’s insane. That’s as much as a couple houses in some parts of the country. One of my relatives is trying to sell his house right now so I sure hope some of this real estate frenzy goes his way!

  2. Charles says

    Hi first time poster, long time reader here. My town here in New Mexico is interesting. It is mostly driven by tourism. Our average household income is below the national average, but 1,000-1,500 square ft houses go for 350-400k+ easily. This has to do to much of the nicer homes being bought for ‘summer homes’. It’s quite interesting that the same average household income homes in the Midwest are easily half the price! I can only see the price of homes here going up, not due to low interest (people who can afford summer homes are very well off and can outright buy a house) but because of the nice weather all year round.

    • Phillip says

      I live in mid IL. Half you say. I just bought 1000 sq foot house with 5 acres $32,000 needed about 10 grand in work. Hard to believe people pay that much for a place to sleep at night. wow.

  3. Carol says

    We live in a suburb of LA considered desirable by the asian community – there are Mainland Chinese buyers coming in with offers of 20-30% over asking, cash, closing in a week. They are definitely diversifying and pulling money out of China, the market is dicey there and no matter what happens, US real estate has always been relatively safe. It’s a little insane – I don’t think we could afford to buy our house now!

    • Financial Samurai says

      It is insane. I was in Lucerne last week and all the luxury goods stores had Chinese writing as they came by the bus load. Sharing the wealth!

  4. says

    There have definitely been some big jumps back up from the bottoms our area hit a few years ago. To put it in perspective, our neighbors down the street bought around the same time that we did and paid about what we did (~$130K). Three years later, they sold for $260K and moved into an even more expensive house than that. There aren’t really bidding wars here, but there are definitely more housing starts in our area than has been seen since 2006. And very few of those are being built on spec like they were back then.

  5. says

    To cool its market, the Hong Kong government instituted higher duties, or taxes, on properties valued at over HK$2 million ($257,610) and lower loan-to-value thresholds for mortgage lending. A special stamp duty hold, introduced in November 2010 was extended from two to three years in October 2012. There is a duty of 20% of the sale price if the seller owns the home six months or less, 15% for homes held between six and 12 months, and 10% for homes held between 12 and 36 months. To break even, home prices have to appreciate above these amounts within these periods.

  6. oadsji says

    You have to analyze the rest of the USA, your can’t analyze places that are having local boom times in one of the most expensive places in SF and extrapolate it to the rest of the country. Just a few miles away houses are much cheaper in daly city and the sunset.

    It’s like your saying there is a boom in Manhattan condos. Those rich people games are very disconnected from the rest of the US.

  7. Bill S. says

    My wife had a much better view of the city from her hospital room in Cal Pacific at Castro & Duboce, but that was about $100,000 for 10 days, so by comparison the condo is a steal !

  8. Dan says

    We live in Bend, OR, a resort town, fast growing, and will be seeing a new 4 year university come here in two years, bringing 10,000 students, plenty of jobs for a town of 80k pop.

    We bought our first home in 2009, then our second in 2011, keeping the first as a rental. Our town was one of the hardest hit by the housing bubble, but is really bouncing back.

    House 1 was purchased for $242k at 5% interest in 2009. It was a short sale built in 2006 and originally sold for $425k and took advantage of the first time homebuyer credit of $8,000. Same floor plan in the neighborhood is currently selling for $350k. We have excellent renters, who have been renting for 3 years but am confident the home will attract enough interest to keep it full in this current environment. House is a block away from a nice school, in a beautiful planned community with a pool, park, and biking trails. Planning on keeping this as rental income and contributing $25k/yr in principle, paying it off in ten years. Refinanced to 4% 30 yr fixed and now grosses $1850/mo. and nets $350/mo.

    Our primary home was purchased in 2011 for $442k, our realtor believes we could list it for $699k and move it quickly. It is a charming large farm home on 5 acres and there is a shortage of custom built homes on property in our market. We are emotionally attached to the home and could see raising kids on it so we have held off on selling as we struggle with the next steps should we sell, as we don’t want to trade a good transaction for a bad one or reduce our quality of life. I would walk from the property if I had the ducks in a row on what I may do with the $280k in equity.

    My wife and I are in our 28 and 26 yrs old with no kids and feel very fortunate with our two transactions at the low of the market, we were very certain as there was clear value in each purchase. We feel now is the hard part, cashing in or just sitting tight for awhile until we have a clear picture of what we want to do next. We are slowly getting diversified in our asset mix $95k cash, $80k 401k, and our real estate holdings. No debt but the two mortgages (wrote a $30k check last month to pay off all the student loans!).

    Any thoughts would be much appreciated! I love the site and believe I am in good company with aggressive personal financiers

    • Financial Samurai says

      $80k cash is a lot. How much do you have invested in the stock market?

      I’d try to keep the cash levels under $10k or less given it’s all about other asset classes except cash.

    • Mike says

      Sounds like you should definitely keep your larger home. You’re currently enjoying it and it will most likely only appreciate in value over time.

      In short, unless there’s reason to believe the area you’re in will for some reason drop in value, keep it until you absolutely need the cash.

  9. Chris M. says

    We live in a suburb north of Chicago- where Hillary Clinton grew up! We had Asian buyers walking up and down our streets asking how to buy a house in our neighbor- only 1 of the 4 could speak english. I would love them to buy a home in my neighborhood…hard workers and meticulous with their property. If they paid cash for mine…I would’ve packed up so fast and moved to San Fran!

  10. Babets says

    I am closing on a house in the 3 state area (around NYC) and bidding is war.
    We saw a property on sale one sunday at 599k, we were thinking about it, monday morning they got 6 offers and sold for 615k.
    There is no inventory and plenty of buyers.
    Thats all i can say where i live.

  11. says

    The housing market in my area has definitely picked up. There were 5 houses for sale in my neighborhood a few weeks ago and they all sold, even a few that I thought were way overpriced!

  12. nbsdmp says

    I’m in metro Detroit, and the market is crazy hot as well. My friend had 18 offers in three days on his home and sold over asking. I had a realtor knock on my door and tell me he had a couple with cash interested in my house and wanted to know how much I would sell it for. It is funny how the “herd” moves…such irrational exuberance in both directions. Like my mentor told me, you only make $ at two times in real estate, the day you buy & the day you sell. I agree even this guy who paid 2.2 will look smart in 20+ years, but really where is all this money coming from? Not everybody is making $1M year right?

  13. says

    I’m with you on the Bay Area – wrote about it today, heh.

    Did you see the walk-up in Noe Valley the other day? Listed at $989,000, then the realtor reported a sale at $1,798,000 (what?), before updating it to $1,150,000. Street parking and you have to climb a hill to get to your front door.

    Great view, but I’d take the condo (with its parking)

  14. says

    Wow, that’s nuts. $2.2 million cash is a ton of money. I wouldn’t spend that kind of money unless I have $10 million net worth. The comments are interesting as well. I guess Portland is under the radar for Chinese buyers. That’s too bad.

  15. Shaun says

    I think the hint at rising interest rates is causing people to buy. I’ve noticed houses in my area that have been on the market for a while suddenly get bought of late. I wouldn’t have expected it given I live in virginia beach and its by far biggest employer is giving everybody(defense) a 20% pay cut right now after a round of layoffs earlier in the year.

  16. says

    I live in Buffalo, which is far from a “hot” market… but even here real estate is on fire. 3 houses in my neighborhood sold just days after the sign hit their yard. High end real estate is no different…the most expensive condos and lofts in the city are turning over pretty quickly in recent months as well. Nothing is sitting on the market too long at any price point.

  17. says

    My wife and I recently accepted an offer on our house and had an offer on another home accepted in Hawaii in 6 days!

    The offer we accepted came in the day after we put it on the MLS… that was QUICK!

  18. says

    Housing in Southern California is hot too! There is a perfect storm in real estate right now, low inventory and high demand. When you factor in the rising interest rates, it gets a little crazy. There have been multiple bids on homes in the $500K range in southern California for about a year. Great time to sell, but where do you move to? Out of state or country is not a choice for me.

    • Financial Samurai says

      Where do you move is indeed the main reason why I don’t want to sell. $500 k sounds like good value!

  19. Marcel says

    Sam – Even as a real estate bull, you must be looking at your properties in SF and considering selling, no? I have tenants in my place and with prices going so high, yields are down quite a bit. So tempting to take the money and run here.

  20. says

    Why am I so skeptical? Everyday I see articles and news stories about how hot the real estate market is right now and, to me, it all just seems so…fishy. I understand and acknowledge many of the purported drivers, but they just don’t add up to the insane appreciation and bidding wars. Ok, so inventory is low because 1) many homeowners are still under water from buying at the height of the bubble, 2) cash investors, both individual and institutional, are snatching up properties and 3) home builders have been idle for a long while and are just now starting to ramp up. Demand is high because 1) rates are still historically low and panicked buyers are afraid rates are going up, 2) some people have been waiting (pent up demand).

    However, all those those don’t add up to the insane behavior going on right now. Unemployment is still quite high. Wages/income are not going up. People are still getting laid off. Maybe I’m way off track, but I just don’t get a good feeling about it all. It’s almost as if the market is over-correcting for the over-correction. Am I crazy??

  21. says

    I still wonder if there is not yet another bubble about to pop. I remember hearing about all these houses that were eligible for foreclosure, but banks were just waiting because they did not want to flood the market. I’m sure SF and other similar markets may be exceptions, but is there any way of knowing how many of these waiting to be foreclosed upon properties there are?

  22. Frank says

    I reside in an area of Texas experiencing an ‘oil boom’ and subsequent rise in property values. Any nice homes available in San Francisco for around $200k? I would like the cooler weather for a change. Thanks.

    • Financial Samurai says

      Sorry, nothing available is SF for under $350k. Seriously. Kinda sad. You might get a good location 600 sqft studio for $500k.

  23. Geek says

    I bought last year and refi’d this past spring at about .9% lower and a shorter term….

    Thank goodness I don’t have to worry about buying for a while. People are nutty about RE.

  24. says

    The market in the Los Angeles area is rising quickly. In the last 6-months, prices have risen a lot and demand is outpacing supply. It feels like the mid-2000′s! I’m kicking myself for not having bought anything last year. It seems like last year would have been the “sweet spot” for making a buy. I hope this is only speculation and things settle down over the next 12 months.

    • says

      Yeah, Spring 2012 would have been nice indeed. I’m glad I didn’t sell last year. But if I could rewind time, I don’t think I would have bought lady year either because I’ve hit my set limit and don’t want to deal with being more of a landlord.

      The recent rate hike should provide a breather. Keep on looking if you are serious!

  25. B says

    Arizona is a boom and bust town. Right now we’re booming, and the key is to time the boom and sell at the top. Generally speaking, it is not a good strategy to be a buy-and-hold investor here, unless maybe you bought in ’10 (or during ROTC or just got a killer deal at some point) and are holding because you great yields.

  26. says

    Lots of international buyers in Vancouver as well parking their Asian money here. I don’t live anywhere near the pricy Vancouver area but a friend who rents says it’s common for them to park their money here and it’s a way to keep money safe in an another currency. They are not playing the real estate market and they don’t even live there.

    Schools are having trouble because families are moving out and residents don’t have kids for those schools.

    • says

      I’ve heard about Vancouver attracting HK money for a while. Will be scary if Mainland Chinese decide to buy up everythig as well which is probably happening.

      The term you describe is “parachute kids” for the children of the wealthy.

  27. says

    I remember that post Sam..you called it. I little off on the number but hey anyone that would have listen would have scored big. Maybe you should take a look at my neck of the woods here in Florida. I’m looking to get into real estate but I’m getting murdered with deals from international buyers. Where are they getting all this cash from? People are buying 795k homes cash and then turn around and demo them to build new ones.

    • says

      I’m actually WAY OFF on my number! There is a winner’s curse though for at the moment, nobody is willing to pay that much.

      There’s way more money out there than we know!

  28. says

    We’re targeting a particular neighborhood that is literally across the freeway but bidding has been incredibly intense over there.

    In the meantime, much nicer/newer homes in my neighborhood sell for 10-20% less on a per/sq-ft basis.

    Location Location Location

    Also, would you please admit that not locking in 3.5% for 30 years was a bad idea!?

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