Is the Market Getting Ahead of Itself?

Ah, Spring. In San Francisco it doesn’t just bring better weather, it often brings with it a heated real estate market. As I’ve mentioned recently, the low inventory levels have us all feeling a bit squeezed.

Looking at comps for a lovely – but not remarkable – home in Bernal Heights the other day has me wondering if we aren’t about to hit the wall in terms of value, with appraisals suddenly becoming an issue again.

This particular home has a value that justifies (IMHO) its list price, but given the low inventory out there, there will most likely be multiple offers and a final sales price that is north of the asking price. Will it appraise? Should it appraise? We can look at this in a couple of ways, depending on how cynical you want to be.

The least cynical view would be that appraisals offer a snapshot of where the market was. Appraisers generally look at sales near a subject property for the past 6 months, so an appraisal gives you a market value based on a snapshot in time. This generally works fine as most real estate markets tend not to turn on a dime. San Francisco, as you may have guessed, isn’t one of those markets. I’ve experienced numerous quick market shifts in the past decade where a sleepy market will turn into a hot market overnight, or vice versa.

A more cynical view is that the market is artificially overheated because of the low inventory and appraisals shouldn’t be coming in at value. My experience, though, is that the San Francisco has enough high net-worth cash buyers that an appraisal not coming in at value won’t ultimately reduce the sales price. What it will do is take the sale away from someone with a loan contingency to someone who can pay all cash. In some markets, all cash buyers can purchase at a significant discount to the list price because they are all cash. While I’ve worked with plenty of cash buyers, I have rarely seen them get a dramatic discount.

In our market, the fact that properties don’t appraise does nothing (ok, perhaps very little) to reduce sales price. It just changes who wins the bidding war.




  1. BrettSF says

    Very true. In fact, I am living this right now trying to get a home with a loan contingency against cash buyers. I have to offer more than I would normally pay, but am doing it to offset the costs of waiting months for this to calm down. An the risk that it won’t calm down for the next year as there may be a steady stream of all-cash buyers as tech company employees start exercising there post-IPO options.

  2. Matt Fuller, GRI says

    BrettSF – sounds like you’ve been having a rough time of it – not that it is much consolation, but you sure aren’t the only one. I have a feeling that the market has caught the attention of plenty of sellers… no quick fix but the inventory will arrive… Good luck, hope you get an offer accepted on a house that you really want!

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