Investing in San Francisco real estate has been a terrific bet for decades. San Francisco and the Bay Area at large is home to world class universities and the most innovative and fast growing companies in the world.
With such strong job growth and wage growth, it's no wonder why San Francisco real estate continues to be one of the most sought after assets in the world. San Francisco real estate faces a domestic demand curve and an international demand curve.
But what about San Francisco real estate now that there's a coronavirus pandemic that is freezing up the real estate market and causing the majority of the tech work force to work from home?
Bottom line: San Francisco real estate is doing very well during a coronavirus pandemic. As long as the S&P 500 declines be less than 35% from its peak (3,386 down to 2,200), San Francisco real estate will likely hold its value or go up in value.
I've lived in San Francisco since 2001 and have seen San Francisco real estate do well after the dot comb crash in 2000 until the end of 2006. During the 2008 – 2009 financial crisis, San Francisco real estate finally declined by about 15% – 20%. But that was due to overleverage in the mortgage market and the S&P 500 was down about 55%.
Since 2009, San Francisco real estate has roared back with a vengeance, and I believe San Francisco real estate will do well during the pandemic.
San Francisco Real Estate During The Coronavirus
The sweet spot for real estate outperformance is somewhere between a 20% – 25% stock market decline.
During such a level of decline, mortgage rates tend to fall as investors buy Treasury bonds. As a result, real estate demand increases because affordability increases. If you haven't refinanced your mortgage yet, I highly encourage you to do so given mortgage rates are at ALL-TIME lows.
Check out San Francisco-based Credible for some free, competitive quotes from pre-qualified lenders in minutes. I recently refinanced to a 7/1 ARM at 2.625% for no-cost.
Further, during a stock market correction, money tends to flow out of the stock market and into real estate and other more defensive asset classes like bonds. As a result, bonds and real estate tend to go up in value.
Real estate is attractive because it provides income and shelter during a storm. And during a coronavirus pandemic with shelter-in-place, real estate becomes incredibly valuable.
San Francisco Real Estate Is Strong During A Coronavirus Pandemic
On February 21, 2020, I stumbled across a quaint three bedroom, three bathroom, single-family home with ocean views. The kitchen had been redone about five years ago with basic finishes. The bathrooms were remodeled maybe 20-25 years ago also with basic finishes.
The property was in the Inner Sunset / Golden Gate Heights neighborhood, which is the best place to buy San Francisco real estate in my opinion. The area is less dense, very quiet for families, surrounded by nature and parks, with homes that often have amazing ocean views.
Overall, the house has about 2,220 square feet of living space and is situated on 3,000 square feet of land. The main downside to the house is that it is one block away from a very busy street: 19th Avenue. 19th Avenue is Highway 1 and has three lanes going each way with bus stops all along the street. With the back of the house facing 19th Avenue, the house was pretty noisy.
The house was move-in ready, although one could easily spend $100,000 updating the house with new windows, new wiring, and new bathrooms. I know I would if I bought the house. Old knob and tube wiring can be dangerous. It's always best to upgrade to Romex wiring and upgrade the sub-panel and main panel if you have the money.
Here are some pictures of this middle-class house.
The listing price was $1.495 million which is below the median home price in San Francisco of roughly $1.6 million. In other words, demand is very high at this price point. With mortgage rates so low, many dual-income couples who earn a combined $300,000 can easily afford this price point if they have a 20% down payment.
The sellers set an offer date of March 6, 2020, two weeks after listing. This is customary in San Francisco as it allows the agent to host two broker tours on Tuesday and at least two open houses on two weekends. Two weeks also creates a small enough window for motivated buyers to put in an offer.
By March 6, the S&P 500 had already begun its downward descent. We had already all heard about the coronavirus when this house first came on the market on February 21, 2020.
Strong Demand For SF Real Estate
With all that's going on in the markets and with coronavirus fears floating around, one would think that demand for this piece of property wouldn't be very high. Oh, how mistaken you'd be.
What do you think the final sales price was?
How about $1.65 million for a reasonable 10% over asking during a coronavirus pandemic? You're not even close.
How about $1.8 million or 20% over asking as the S&P 500 and the Dow were crashing by 30%? You're still way, way off.
OK, surely $1.95 million, or a whopping $455,000 over asking was the winning price as the coronavirus shut down the Bay Area economy with shelter-in-place. Three strikes and you're out!
The property closed on March 25, 2020 and the final sales price was $2,088,000 or an incredible $539,000 over asking!
Besides the final sales price being 39% higher than the list price, the final sales price was also 7.5% higher than Redfin's estimate of $1,946,632. Redfin usually has the most accurate online property estimate today. Although, it still can't account for remodeling work properly.
Given the property closed on March 25, only 17 days after the offer due date, the property was likely purchased with 100% cash. The buyer is also likely Chinese given the two 8s in the final sales price.
The buyer could have backed out of the property at any time before the closing, but didn't. This is despite the S&P 500 crashing by 30% from its highs on March 23.
If the property was tracking the S&P 500 down 30%, then Redfin would have estimated the property's value not at $1,946,300, but closer to $1,362,000. Instead, the property went for a whopping $2,088,000.
If you own property in this neighborhood, you are giving yourself a high-five! And if you own a single family home anywhere in San Francisco, you are likely tremendously outperforming the S&P 500. Real estate across the country is likely seeing a tremendous amount of demand right now, especially if the brokerage business opens up.
San Francisco Real Estate Is Doing Well
I have first hand knowledge of the Inner Sunset / Golden Gate Heights neighborhood because I've been recommending investors buy this neighborhood since 2017. There is tremendous upside value to homes with ocean views, given ocean view homes in every major international city in the world are trading at tremendous premiums to the median.
If the S&P 500 was flat during the time of sale, I would have guessed the property would have gotten at most $1,900,000, or $405,000 over asking. I certainly would have not guessed over $2,000,000. Therefore, it is possible the violent selloff in the stock market pushed the value of this house even higher. This is the rotation of money out of stocks and other risk assets and into real estate and bonds that I've been talking about.
If you plan to buy San Francisco real estate, here are some key takeaways from this property sale example:
- Look for property that is priced around the median home price for your city. A property priced close to the median or lower helps ensure the highest amount of demand, no matter what market. Higher end property is likely going to sit much longer.
- Single-family properties tend to perform stronger than rental properties since single-family properties usually don't rely on rental income. Therefore, condos will not do as well.
- Find a property with a unique attribute, like a large lot for expansion, ocean views, or designed by a well-known architect. Panoramic ocean view homes in San Francisco are the gems.
- Proper marketing is very important to get the maximum price. Although selling fees are still outrageous, great marketing really does matter for getting top dollar.
- Neighborhoods with lower density should become more attractive given neighborhoods with higher density (apartments/high-rises) seem to have experienced a higher number of coronavirus cases.
- Due to the rise of ridesharing and telecommuting, widen your search for better value. The premiums neighborhoods received that were closer to work centers is rapidly fading.
When you're forced to shelter-in-place, your home becomes increasingly valuable! Millions of Americans are now spending dozens of hours more in their homes each week. As a result, expect to see the desire for remodeling and slightly bigger homes go up. Expect to also see the demand for homes overall go up.
More San Francisco Bay Area Property Sales Examples In A Pandemic
One property doesn't make a trend, but the $2,088,000 example is not an outlier. It is a typical single family home in San Francisco.
Below is a lovely Oakland single family home with five bedrooms, three baths, 3,130 sqft that was asking $2,595,000 on March 12, 2020 and sold for $2,810,000 on March 27, 2020. It was very nicely renovated in 2016.
Below is a San Francisco single family home with five bedrooms, six bathrooms, and only 4,645 sqft that sold for a whopping $9,500,000 on March 27, 2020. Although the final sales price wasn't over its $9,500,000 asking price, the sales price is about $460,000 over Redfin's estimate price.
What's really interesting about this property is how it probably needs another $1 million in renovations. To be able to spend $10+ million on a home during a coronavirus pandemic is extremely impressive. Usually, you would think that the super high end would be weak. Only super remodeled, pristine properties should sell. This one was not one of them, but is still in the prime Presidio Heights neighborhood.
Real Estate Is A Defensive Asset Class
Real estate is my favorite asset class to build long-term wealth. It's much more stable and provides much more utility and joy. While stock investors are losing their shirts as their phantom wealth disappears, real estate investors don't even care about the volatility because they're too busy enjoying life!
During the 2008 – 2009 financial crisis, I continued to receive my rental checks because my tenants kept their jobs. Rent prices stayed flat for two years, and inched up to catch up with inflation.
During the 2020 coronavirus crisis, I expect rents to stay steady as well, especially with the government providing tremendous stimulus for Americans most in need through the CARES Act.
You may not have the funds to buy a single family home in San Francisco, Oakland, or the Bay Area just yet, but I do think investing in real estate over time is a wise move.
Take a look at the performance of Fundrise, my favorite real estate crowdfunding platform. Notice how Fundrise's platform portfolio outperformed in 2015 and 2018 when the stock market returns were dismal. Also notice how the returns are pretty steady each year. I expect Fundrise to continue to show steady performance in 2020 and beyond.
Sign up for Fundrise for free to explore their various private eREITs. If you're looking to invest in real estate and diversify your real estate holdings, Fundrise is great.
If you want to invest across America to find better cap rates, lower valuations, and higher growth, check out CrowdStreet. CrowdStreet allows you to invest in specific commercial real estate deals.
Just be aware that with shelter-in-place, multi-family property at universities and hotel investments are taking an income hit. Only invest in such deals after they've been properly repriced. There could be a lot of opportunity.
San Francisco real estate continues to be the “Rolls Royce” of United States real estate. It is quickly cementing itself as one of the great international cities of the world, along with London, New York, Hong Kong, and Paris.
I'm confident that in 20+ years, your children will be amazed by how cheaply you were able to buy San Francisco real estate today. Just make sure to always run the numbers!
Again, if you haven't refinanced your mortgage yet, please at least check the latest mortgage rates with Credible. You can also try LendingTree. Rates are so low now that it is making San Francisco real estate much more affordable. Check mortgage rates online and then call your bank to see what they have to offer.