Is San Francisco Bay Area real estate in a bubble? It is not. In fact, the San Francisco Bay Area real estate market is probably one of the best values in all the country right now as we come out of the pandemic.
Where many parts of the country saw massive price gains during the pandemic, the San Francisco Bay Area real estate market had much more moderate gains. Rents even fell overall, but not for homes on the less dense west side of the city.
After the NASDAQ gained over 40% in 2020, more residents in the Bay Area are richer than ever before. As a result, they are converting some of their massive gains into buying real estate.
With interest rates down, the value of rental income has gone way up. And with more people working from home, the value of real estate has seen a structural jump in value.
The San Francisco Bay Area real estate market is one of the most attractive real estate markets in the country as people rush back to big city living again.
Buy San Francisco Bay Area Real Estate Post Pandemic
There is a real estate buying opportunity right now in San Francisco, especially on the western side in the Sunset where there are more single family homes.
There is no bubble in the San Francisco Bay Area real estate market in 2020 because mortgage rates have collapsed to all-time lows. I just locked in a 7/1 ARM with a $4,000 credit at 2.125% in June 2020. That's NUTS!
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San Francisco Housing Market Prices
1Q2018 was the peak in San Francisco Bay Area real estate. We now having rising inventory of 50% – 150% YoY in San Francisco and San Jose as sellers are now rushing to the exits after an extraordinary price rise since 2012. See chart below.
With a lot more inventory, you had a lot more to choose from. Prices are down 5% – 10% from 1Q2018 peak as a result, depending on property type. Condos are down more the SFHs, and SFHs in borderline areas are down more than SFHs in prime areas.
Take a look at the inventory chart where you've seen a surge in listings in 2018 that is expected to carry through in 2019. Whenever you have so much more inventory, price declines are an inevitability.
But in 2021, San Francisco real estate inventory has tightened. Given the value of real estate has gone up, less homeowners are willing to sell their homes. Less people want to try and buy a home in this market as well. Therefore, people simply are holding onto their homes for longer.
Two Positives For SF Bay Area Real Estate
The two positives for SF Bay Area real estate are Tech IPOs and the opening up of big cities thanks to vaccinations. People are now rushing back to San Francisco, especially with case rates at some of the lowest in the country.
The other positive is that mortgage rates have come back down after the Fed signaled they would no longer be hiking. This caught the market by surprise and now there's increased buying activity.
Buying activity is picking up strongly starting in 2H2020 due to shelter-in-place rules earlier in the year. And in 2021+, the demand for San Francisco Bay Area real estate is at an all-time high.
The San Francisco Bay Area will always be a desirable place to live. As a result, the real estate in the area will always be very expensive. It's good to own at least own San Francisco Bay Area property as I think it is considered a premier asset in the world.
Latest San Francisco Median Home Prices
Although the below chart looks a little scary, the fact of the matter is that San Francisco real estate is relatively attractive due to high wealth and income. The latest San Francisco median home price is about $1,800,000.
However, when you have 22-year-old college graduates making $200,000, prices are very affordable in San Francisco. In fact, if the U.S. housing market could go up another 30% – 75% if it ever gets re-rated like the Canadian housing market!
Diversify In The Heartland
In addition to owning San Francisco real estate, consider investing in the heartland of America. Cap rates are closer to 10% in the heartland versus 2.5% – 3% in the San Francisco Bay Area. Thanks to positive demographic trends and the acceptance of working from home, lower-cost cities are hot.
Take a look at the two leading real estate crowdfunding sites Fundrise (for non-accredited investors) and CrowdStreet (for accredited investors) for free. You can invest in multifamily and commercial real estate around the country for 8% – 12% cap rates for as little as $1,000 – $10,000. Diversify your investments instead of taking one huge concentrated bet with leverage in the Bay Area.
Fundrise offers diversified eREITs for broader real estate exposure. While CrowdStreet offers individual investments primarily in individual properties in 18-hour cities.
There is a structural shift towards lower cost areas of the country due to affordability for both the companies and the employees. This trend will continue with the help of technology and remote work.
I'm still bullish on the SF Bay Area longer term and still have a primary residence and a rental property that’s paid off. But there's no reason why other cities can't be the next San Francisco or the next San Jose thanks to technology.
About the Author:
Sam started Financial Samurai in 2009 as a way to make sense of the financial crisis. He proceeded to spend the next 13 years after attending The College of William & Mary and UC Berkeley for b-school working in investment banking. In 2012, Sam was able to retire at the age of 34 largely. His investments now generate roughly $220,000 a year in passive income, partly thanks to his investments in real estate crowdfunding. He spends time playing tennis and taking care of his family.