John M. Lee: Real Estate is A Good Investment

I can still remember my parents purchasing their first property in 1974 for $75,000. We thought that was a lot of money.

I remember when I purchased my home in the Richmond District for $250,000 in late 1980's and thought about how I will never pay it off. How times have changed, these properties are worth much more than what we paid for them and we are glad that we purchased at the time when we did. Most buyers are facing exactly what we have experienced and hopefully are making the same decisions that we made.

Selling real estate for the past 15 years now, I have learned much about the San Francisco real estate market and hope to summarize the highlights for you this month.

The first and most important principle is that San Francisco is built-out and there is no more land available except for a small piece here and there. With the scarcity of land and constant demand, prices have to go up. On the west side of town, the value for a 3,000-square-foot lot is in the $500,000-plus range. They are not making any more land, so prices will continue to climb. We might get a correction once in a while, like we did last year, but in the long term, prices will appreciate.

I have developed what I called the seven/four rule, meaning real estate prices will go up or remain flat for seven years, then go down for four, resulting in 11 year real estate cycles from peak to peak, and valley to valley. The peak years tend to be towards the end of the decade and the low years near the beginning of the decade, with transition years in the middle.

Most appreciation happens only in two to three year windows where we get double-digit appreciation, and sometimes even in the 20 to 30 percent range annually. We saw these windows in the late '70s, late '80s, and again in the late '90s.

And then an external event usually happens which leads to a decline. The events are usually unexpected in nature, such as the oil crisis in the early '80s, earthquakes, the Iran-Iraq war, recession in the early '90s, the stock market's crash and Sept. 11 terrorist attacks.

But then the down years set us up for a rebound. It happens slowly at first, and then before anyone is aware of it, double-digit appreciation sets in and we have a hot market once again.

If you understand the real estate cycle, you can profit from it.

Where are we at currently? We peaked out in the marketplace about a year or one-and-a-half years ago, depending on where in San Francisco. If we follow the seven - four rule, we should have another couple of down years. However, there are signs that indicate our real estate market has already hit the bottom and is turning up once again.

The stock market bottomed in September of 2001 and the real estate market typically lags the stock market by 9 to 12 months. However, some recent data and research have shown that the lag time has been compressed to about six months. This is because so much more money has been invested in the stock market that it has more of an effect on the real estate market.

Also, financial information tends to flow through all the markets much quicker, shortening the time for buyers and sellers to react to the changes. If this time compression is real, then the real estate cycle will be shortened to reflect the changes also.

This year, I have already seen a large number of properties that were on the market at the end of 2001 without any offers, sell with multiple offers the first three weeks in January.

The phones are ringing again with buyer inquiries and traffic at Sunday open houses are up once again. These are signs that the real estate market is picking up, and that maybe we have broken the cycle sooner than expected. Whether this is a spike or a sustainable trend remains to be seen. We will not be able to tell until we look back at it a few months or even a year from now.

However, the long-term prognosis for real estate remains very positive because:

· Interest rates remain low and are expected to be in the seven percent range throughout the year;

· There still is much cash on the sideline, waiting to be invested in real estate or other ventures;

· Our population continues to grow, increasing the demand for housing;

· Our economy is coming out of a recession and should improve in the coming years.

All these factors point to the conclusion that if you invest in San Francisco real estate for the long term, you will end up making money.

Our real estate prices continue to be the highest in the nation. It seemed high when I purchased my home, but looking back now, it was the best decision I ever made.

John M. Lee is a top selling broker at Pacific Union, specializing in the Richmond and Sunset districts. If you have any questions regarding real estate, call him at (415) 447-6231 or e-mail isellsf@aol.com.