San Francisco Real Estate: Credit Squeeze Stalling Deals

With the national real estate market still in tumult, how is the pricey San Francisco market faring for investors? “The worse the market gets, the more investors tend …

With the national real estate market still in tumult, how is the pricey San Francisco market faring for investors?

“The worse the market gets, the more investors tend to come out to take advantage of deals out here,” Luba Muzichenko, a Realtor with Zephyr Real Estate in San Francisco, says. Muzichenko blogs about San Francisco real estate at www.lubasf.com.

Unfortunately for those investors, a credit drought may stand between them and some of the better deals seen in San Francisco in years. “Finding financing has made it much tougher for investors to actually purchase the deals that they’re after,” Muzichenko says. “With down-payment requirements that hover between 30 to 35 percent at a minimum and lenders scrutinizing both the investor and the investment property, closing the deal is that much more difficult than finding it.”

Investment in San Francisco has historically been a high-rent stake in one of the country’s most exclusive markets. However, with median sales prices of single-family homes plunging to $710,000 in April from $933,500 a year earlier as well as an estimated 66 days on the market as opposed to 40 days on the market in April 2008, the golden market is seeing its share of tarnish.

At the same time, foreclosure sales accounted for nearly half of all sales in the San Francisco Bay Area in April, according to San Diego research firm MDA DataQuick.

These conditions have given rise to a wave of overseas investors descending upon San Francisco, hoping to obtain historic deals. “I’m seeing more and more foreign investors coming into San Francisco with all cash – they have no chance of obtaining a loan in the current lending climate,” Muzichenko says. “The driving force for this influx of foreign money is the investors’ belief that we are heading for a period of great inflation and the investors are spending currency by buying tangible items such as gold, antiques and, particularly, real estate to act as a hedge against inflation.”

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An Investor Attraction?

As impressive as San Francisco is on the visual, historic and cultural fronts, it has aspects that are not particularly attractive to many investors. Aside from prices that are still considered high compared to much of the rest of the country, the city enforces policies that some see as investor-unfriendly. Paramount among these is the idea of rent control, or laws that set that a price ceiling on residential housing rents.

“San Francisco embraces rent control, which effectively acts as a private subsidy to tenants,” Muzichenko says. “The longer a tenant has lived in their unit, the cheaper their rent, regardless of their income level. I’ve actually seen people buy and pay off income property themselves while living in rent-controlled properties.”

In turn, she says, investors have become wary of rent-controlled properties in San Francisco, instead seeking out properties built after 1980 in order to reduce the risk of having long-term tenants with extremely low rents. As a result, property prices on the whole have been driven higher, creating a difficult market for many investors – particularly those who are not cash-only buyers – to enter given banks’ current reluctance to finance deals.

“The main thing keeping (investors) from buying isn’t the lack of desire – it’s too-strict lender requirements,” Muzichenko says. “While I believe the previous practice of giving money away to anyone with a pulse and a bank account was ridiculous, I think lenders have swung the pendulum too far in the other direction now and we would be able to recover from the recession much faster if lenders were to just loosen their most stringent requirements.”

Future Outlook

With debate continuing as to whether the U.S. real estate market has hit bottom, San Francisco’s short-term outlook is still somewhat unknown, according to Muzichenko. “A lot will depend on whether lenders continue to be tight-fisted and ruin many deals,” she says. “The buyers are out there – both investors and homeowners.”

She believes that most of San Francisco has hit bottom, with some neighborhoods still fluctuating. “Even they will hit bottom within the next six months,” she says.

The recently released Standard and Poor’s/Case-Shiller Index backs Muzichenko’s assertion that home sales are stabilizing. The Index shows that sales volume has been on the increase since January. That said, the Index shows that sales still have a long way to go before the market can once again considered robust. The San Francisco metropolitan area showed a year-over-year drop of 30.1 percent in March, as opposed to January’s 32.4 percent record tumble.

Muzichenko is more sanguine when it comes to San Francisco’s long-term outlook. “San Francisco has always had good and steady appreciation that has typically been slightly above the national average of 5.5 percent,” she says. “Even if we go back to a conservative appreciation of 3 to 4 percent per year, within five years the San Francisco market will again be considered a safe investment and the ones that bought their properties at or close to the bottom of the market – now – will be quite comfortable.”

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