San Francisco Real Estate: A Perfect Storm of Obstacles for Home Buyers

The San Francisco real estate market is fiercely competitive right now. Most home buyers know this already. It has been the overriding news story for months.

But some are still surprised by the number of all-cash buyers, the dearth of inventory, and the steadily increasing cost of housing. Home buyers in this housing market are facing a perfect storm of challenges.

The San Francisco real estate market has undergone a total transformation over the last few years. Gone are the days when home buyers could pitch low-ball offers to desperate sellers. Gone are the inventory surpluses and the rock-bottom home prices. It’s a whole new housing market, one that is replete with well-heeled investors and other all-cash buyers.

San Francisco’s Market Evolution

Housing inventory in San Francisco continues to drop, although at a slower pace than in the past. According to Realtor.com’s monthly housing summary, the total number of real estate listings in the metro area dropped by nearly 22% over the last year. At the monthly level, however, inventory has actually risen a bit. But the year-over-year trend is undeniable. There are far fewer homes available today than in the past. This is one of several obstacles home buyers will face.

The median list price for the San Francisco metro area has risen by more than 14% in the last year, according to Realtor.com. This is not at all surprising, given the current level of demand and the shortage of inventory in and around the city.

This just in: According to the closely watched Case-Shiller Home Price Index, released earlier today, the average home price within the San Francisco real estate market rose by 24.5% from May 2012 to May 2013. That was the largest annual gain of any metro included in the 20-city index. From April to May of this year, home prices rose by 4.3% — the largest monthly gain among the 20 benchmark cities.

According to San Diego-based DataQuick, the median sales price for homes in San Francisco rose by nearly 24% from June 2012 to June 2013. The nine-county Bay Area median price rose by 33% during the same period, reaching its highest level since December 2007. During the same 12-month period, sales volume dropped by almost 25%. This is not due to a lack of demand, but a lack of inventory. There are simply not enough homes on the market to satisfy the current level of demand.

Buyers are indeed facing a perfect storm of challenges in the San Francisco real estate market. All-cash buyers are making it tough for mortgage-backed buyers to compete. Sellers are reluctant to accept bank-backed offers that can “fall through” when there’s a cash offer on the table. The dearth of inventory only heightens this obstacle. Home prices are still rising as well, creating affordability issues for many would-be home buyers.

To compete under these conditions, buyers must be ready to make aggressive, yet well-researched, offers in a timely fashion. This is not the kind of real estate market where you mull it over for a few days. Well-maintained homes in desirable locations are being snatched up within days of listing. This is true for the broader Bay Area in general, and the San Francisco housing market in particular.

In many cases, buyers are making offers 20% to 30% above asking price, just to get ahead of the crush. It’s a level of demand we haven’t seen since the housing bubble of the early to mid-2000s. Let’s just hope this one ends better than the last.

Real Estate Tip of the Day: Comps

In a hot real estate market, home buyers must move quickly yet wisely. Knowledge is key, particularly where house values are concerned.

Enter the “comp.” Real estate agents and professional home appraisers rely on recent and comparable sales — or comps — to determine the current market value of a particular property. Home buyers would be wise to do the same.

Price awareness gives you a competitive advantage in the form of market insight and speed. Savvy investors know this. They research market conditions and trends constantly, so they can make a well-researched offer on short notice, when the time comes. In a fast-moving real estate market like San Francisco (and much of California, for that matter), this has become a necessity.

Fortunately, this information is easy to come by. Websites like Realtor.com, Zillow and Trulia show the prices of recently sold homes with an interactive, map-based format. The key is to do this research early and often. Home buyers should have a pretty good sense of property values before they even enter the market. Things move fast. Hot properties sell within days. There’s little time for on-the-spot research and analysis.