Are you a potential buyer and wondering: Will San Francisco Bay Area home prices ever go down?
Prices did softened in the San Francisco Bay Area housing market in 2018 because rents were softening and inventory was going up.
Then San Francisco home prices started inching up in 2019. By Feb 2020, San Francisco home prices were extremely strong and then the coronavirus pandemic hit.
In 2021, San Francisco Bay Area home prices were at record-highs. There was really only a three-month window from March 2020 – through June 2020 where one could have gotten a deal during the pandemic.
In 2022, high levels of inflation, a slowing economy, and rises in interest rates put a damper on the frenzy for San Francisco real estate. However, there hasn't been a significant blow to prices yet. Multi-million dollar homes are sitting for longer, but are still turning over. And most entry level homes continue to sell fairly quickly at or above ask.
In 2023, the Fed has continued to raise rates and expectations are it will continue to raise until the Fed Funds rate reaches 5.25-5.50% or perhaps even 6.0%. Although the 2023 housing price forecasts have been all over the place, the bias is toward the downside. It's likely there will be a recession by the end of the year.
For those looking to buy property in 2023, there should be plenty of opportunities to do so at more reasonable prices. Possible declines in both housing prices and mortgage rates could make real estate more attractive by the middle of 2023.
San Francisco Bay Area Home Prices
House prices are determined by rents and rents have softened due to the large construction of luxury condos, the slight increase in inventory from Airbnb units, and the pandemic which made landlords cut rents. I know this first hand because I’ve been a SF landlord since 2005.
For my 4 bedroom, 3 bathroom rental house in May 2017, I was receiving $9,000 a month. After 45 days on the market, the best two offers I got were for $7,500 a month = 16.7% decline. Instead of trying to rent it out for much less, I sold the house for $2,740,000 = 30X annual gross rent. I wanted to hold it forever, so my kids would have something to manage or somewhere to live just in case, but I just couldn’t take being a landlord anymore.
For my 2 bedroom, 2 bathroom condo rental, my previous tenants found the new tenants for me so I kept the rent flat at $4,200/month. In retrospect, I should have tried to raise the rent to $4,300 or $4,400 to cover the rising HOA and property taxes. But, I didn’t want to risk losing them (landlord mentality now vs let’s raise the rent). The only “benefit” I got was not losing a month or more worth of rent looking for another tenant.
Here's a look at the San Francisco median sales price appreciation trends for houses.
And here's how the San Francisco median sales price appreciation trends for condos has changed by year.
San Francisco Rents
Rents are down from the highs, but they have stabilized in SF and most other cities (except for Chicago, Miami, and New York City). At the start of 2023, rents are now roughly 15% up from the lows of the pandemic, but are still down about 15% from early 2020.
Property taxes in Illinois are top 3 in the nation, and you will freeze your buns of steel off for four months a year. Not a surprise. The New York City market is very weak as well and that market is generally the leading indicator for high end real estate demand in America.
I ended up reinvesting $500,000 of my SF rental house sale proceeds in June 2017 in much cheaper real estate in the heartland through real estate crowdfunding. The prices in non-coastal cities are closer to 10X – 15X annual gross rent (from 30X annual gross rent), and yields/potential returns are 8% – 15% vs. -5% to +2.5% in SF. In other words, for 1/5 the amount of risk exposure I’m taking, I can earn the same amount of income.
Buyers of SF real estate and coastal real estate should be pickier now. But knowing how people lose their heads bidding on properties, I suspect there will continue to be huge overbids at high prices. Remember, leverage is your friend on the way up, and your mortal enemy on the way down.
If you only have your primary residence, then keep on holding and enjoying life. If you have two or more properties, you might want to consider selling because there are plenty of better money making opportunities out there.
SF Real Estate Heats Up Again
The tech IPO mania with Uber, Lyft, Pinterest, Airbnb, Slack, and more injected a lot of new capital in the SF Bay Area housing market after a 11% decline in median price in 2018.
The below chart shows how prices rebounded in 2019 and held up strong through 2021. Prices did dip due to the pandemic. However, prices picked back up in 2021 after the NASDAQ closed up 44% in 2020.
When mortgage rates dropped to near all-time lows, housing affordability in San Francisco went way up. After the economy opened up in 2H2021, there was a lot of pent up demand to buy homes. Here are the best neighborhoods to buy in San Francisco.
If you are still wondering will San Francisco Bay Area home prices ever go down, please stop. San Francisco Bay Area home prices continue to trend up and to the right and will likely heat up further as thousands of tech IPO millionaires get liquid.
I recommend buying San Francisco properties and San Francisco rental properties as well. There are always deals to be found if you stay patient, do your due diligence, and look long enough.
Finally, one of the best real estate investing strategies is to own a primary residence in the SF Bay Area and invest in real estate crowdfunding in lower cost areas of the country. This is a real estate investing rule called BURL: Buy Utility, Rent Luxury.
If You Cannot Afford San Francisco Bay Area Home Prices
If you can't afford SF Bay Area real estate, check out heartland of America real estate instead through a company like Fundrise, one of the largest real estate crowdfunding companies around. It's free to sign up and valuations are much cheaper with much higher net rental yields.
Personally, I've invested $810,000 in real estate crowdfunding through the likes of Fundrise and CrowdStreet to take advantage of lower valuations in the heartland. The spreading out of America is real. I want to take advantage of the trend and earn more income passively.
Further, please check the latest mortgage rates online if you're looking for a new mortgage or to refinance. You can do so for free using a lending marketplace where qualified lenders compete for your business.
I got a new mortgage for only 2.25% without fees when I bought my last San Francisco property. Rates have come up since then, but are always changing. Shop around today and see if you can save; it's free to check and explore.
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Will San Francisco Bay Area Home Prices Ever Go Down? is an FS original post. It will likely be years before San Francisco Bay Area home prices go down again due to the strength of the local economy.