Housing: San Francisco Home Buyers Are in for a Tough Summer in 2013

The summer home buying ‘season’ is right around the corner. Sales activity usually picks up in the summer months, as home buyers with children rush to take advantage of the school-closure window.

Home buyers within the San Francisco real estate market could be in for a tough summer. They will have to battle with hordes of other buyers for a limited number of homes. There are three primary reasons for this:

1. Fewer Homes for Sale in San Francisco

You’ve probably heard about the inventory situation in San Francisco. But just how bad is it? According to Realtor.com, the number of homes for sale in San Francisco’s housing market fell by nearly 38% over the last year or so. That wouldn’t matter much if demand was low. But this is happening at a time when demand is growing due to market stabilization and job growth.

And don’t expect the inventory situation to change anytime soon. San Francisco is a unique city, historically as well as geographically. It’s not the kind of city where you can (or should) put up row after row of tract homes to meet rising demand.

According to Jed Kolko, chief economist with Trulia: “After seasonal adjustments, inventory is still falling; the underlying trend is still downward.”

And that brings us to item #2.

2. Lack of Construction Favors Sellers

Other cities with inventory shortages can do something about it. In Phoenix, for example, major residential construction projects are underway. There’s plenty of space to build new homes in such places. But San Francisco is different. There is no room for such development. This will prolong the current status quo of limited inventory and seller advantage. And nothing drives a bidding war like limited inventory.

According to Lawrence Yun, chief economist for the National Association of Realtors: “Only new home construction can genuinely help relieve the inventory shortage, and housing starts need to rise at least 50 percent from current levels.” New construction is do-able in a city like Dallas or Phoenix. In San Francisco, not so much.

3. Real Estate Investors are Still Active

Real estate investors have been a major presence in the San Francisco real estate market. Investment activity began to heat up in 2010, as local home prices were bouncing along the bottom. Investors are a big reason why inventory is so low right now.

Typically, investment activity drops off when prices rise, reducing the potential for resale profits. But that hasn’t happened yet. Investors are still very active in the San Francisco housing market. They must think prices have further to climb (prices are certainly nowhere near their 2006 peak).

The Cumulative Effect

We are already seeing the impact of these overlapping factors. California home sales were down 3.1% in February, compared to a year earlier. This is not from a lack of demand — there’s plenty of that at the moment. It’s from a lack of supply.

It’s no wonder San Francisco is one of the top ten U.S. cities where asking prices are rising the fastest.

For these and other reasons, home buyers in San Francisco will face serious competition this summer. Buyers should expect multiple-offer scenarios, along with the occasional bidding war for desirable properties. It gives new meaning to the phrase “buyer beware.”