Why Are San Francisco Real Estate Prices Going Up With Rents Down?

Despite reported rents going down anywhere from 15% for 2-bedrooms to 30% for studios in San Francisco, San Francisco real estate prices keep going up in 2020. The question is, how come?

As a resident of San Francisco since 2001, a homeowner since 2003, a landlord since 2005, and a personal finance blogger since 2009, I’ll share with you my perspective on why San Francisco real estate prices keep going up.

Big media like Bloomberg, SF Chronicle, and more love to focus on the negatives. Perpetually negative local blogs like SocketSite and Wolf Street, who missed the big run up since 2011-2012 also like to focus on the negatives. However, I’m here to tell you a more balanced point of view.

Yes, I’m long San Francisco real estate. But I also sold a single family home in The Marina district for $2.74 million back in 2017. Therefore, I feel I have a balanced perspective on the market. I’m also a landlord who recently spent a month interviewing a dozen prospective tenants.

San Francisco real estate prices keep going up, as you can see in the chart below. Let’s explore why.

Why Are San Francisco Real Estate Prices Going Up With Rents Down?

Why Are San Francisco Real Estate Prices Going Up When Rents Are Going Down

There are the main reasons why San Francisco real estate prices are going up despite rents going down.

1) Mortgage rates are down even more.

Ever since the Federal Reserve and the federal government decided to unleash trillions of dollars of stimulus to counteract the pandemic, mortgage rates have plummeted.

Below is a historical chart that shows how much mortgages rates have declined since the end of 2018, when the Fed actually hiked rates.

Why Are San Francisco Real Estate Prices Going Up With Rents Down? Mortgage rates are way down

Due to record low mortgage rates, affordability is way up. You can get a 30-year fixed mortgage for under 3% and a 7/1 ARM for between 2% – 2.25% with minimal fees.

With the average 30-year fixed mortgage rate dropping from 4.85% in lat 2018 to 2.85% in late 2020, that’s a 41% decline. Rents going down 30% still makes buying a home cheaper on a relative basis. Further, rents and home prices could shoot back up if there is a vaccine in 2021+. But your mortgage rate will stay fixed at a low rate for years.

If you are looking for a great mortgage, check out Credible. Credible has the best group of qualified lenders competing for your business so you can get the lowest interest rate possible. It’s free to get a mortgage rate quote and compare.

2) Great migration out west.

Instead of moving to Des Moines, Iowa to save money, most rational San Francisco residents are first looking within San Francisco to save on rent on home purchase prices.

There is a great migration from east to west because rent and home prices are cheaper, there’s more space, cleaner air, more parks, and less congestion. Rent and home prices in neighborhoods like the Richmond and Sunset are 20-30% cheaper than home prices in SOMA and the Mission.

There is also some migration from the very pricey northern neighborhoods of the Marina, Pacific Heights, and Presidio Heights out west for similar reasons. Home prices in the Sunset and Parkside are 40% – 50% cheaper than homes in Pacific Heights and Presidio Heights on a price per square foot basis ($800 – $1,000 vs. $1,200 – $1,800).

Further, the best area to buy in San Francisco is Golden Gate Heights, given there are mainly only single family homes. Roughly half the homes in GGH have ocean views, which make current pricing extremely undervalued. If you go to any international city, homes with ocean views trade at 50% to 100% PREMIUMS to the median. Therefore, many savvy buyers are looking for ocean view homes in SF.

Geo Arbitrage is pushing up San Francisco real estate prices on the west side

My Recent Tenant Hunt

I recently spent the second half of August and the first half of September 2020 looking for tenants for my 4-bedroom, 3-bathroom property for $6,850 a month in Golden Gate Heights. It was the first time looking for tenants for this property because it was my primary residence.

I decided to list the home on the relative high end in order to have some wiggle room to negotiate down.

In the end, I found a great family with two young kids for $6,550 a month. I had a lot of demand from four individual roommates all moving from the east side of San Francisco (SOMA and the Mission) to the west side of San Francisco.

One set of four engineers wanted to pay me $6,850 a month. However, I decided to keep looking because of their attitudes. Instead of having to deal with four individual units, I decided it was better to rent to a family for less. I’m very happy with this decision.

3) Tech stocks are on fire

Home prices are driven by income and wealth gains. With the NASDAQ up over 25% in 2020, tens of thousands of techies have gotten extraordinarily wealthy during the pandemic.

Companies like Apple, Facebook, Google, Tesla, Netflix, Nvidia, Square, Twitter, Zoom and more have all done well in 2020. I don’t even work at a tech company and I feel richer despite my relatively small tech holdings.

It is highly unlikely that San Francisco real estate prices will go down when some tech stocks are up well over 100% during the pandemic.

I’ve met plenty of couples who work at Apple who are at least $1 million wealthier after the pandemic began. Many want to buy a new home to upgrade their lifestyle.

4) Way more time spent at home.

With much more time spent working from home, the intrinsic value of a home has gone way up. Before the pandemic, the average person maybe have spent 12 hours at home on average. Now that average time spent at home has shot up to around 20 hours, or 67% longer.

The more time you spend using something, the more valuable it becomes. Homes may not be worth 67% more. However, the intrinsic value of a home is worth at least 10% – 20% more.

People are buying larger homes to accommodate more home offices. People are buying more homes with more decks and outdoor space. Homes that are closer to parks are also seeing high demand.

5) Increased desire to own real assets.

After the S&P 500 corrected by 32% in March 2020, it was a wake up call to millions of San Francisco Bay Area homeowners to diversify away from stocks and into real assets. Real estate is the logical beneficiary because real estate is less volatile, provides shelter, and can generate rental income.

In essence, many tech workers are exchanging their funny money stock gains into real assets. This way, they hope they can make their winnings last longer.

Money is meant to be spent on living a better life. You can’t live in your stocks and raise a family in your stocks. But with all of us spending more time at home, we are all appreciating the value of our homes more. As a result, you are seeing a consistent upgrade cycle among all levels of buyers.

Home in Inner Sunset closed for $205,000 over asking on 10/16/2020

6) The desire to buy ahead of an eventual V-shaped recovery.

Anybody who has lived through the 2000 tech bubble remembers that the city went quiet for about two years and then roared back. Same thing happened after 2008-2009.

Many savvy buyers are taking advantage of fearful sellers by buying now, before there is a potential vaccine. The opportunity to buy big city real estate has never been greater.

I know multiple wealthy parents who are buying rental properties and single family homes for their portfolio. They are also buying rental properties as a hedge for their children.

There has always been a real fear that investors would get shut out of the SF real estate market if they didn’t buy. Further, there is a fear by parents that their kids will get shut out after graduation.

By buying rental properties now, investors can earn rental income and provide a hedge for their children in case they graduate jobless. Their kids can manage the rental properties and gain a sense of pride.

7) The value of cash flow has gone way up.

Because interest rates have gone way down, the value of any cash flow has gone way up. The reason is because it takes a lot more capital to generate the same amount of risk-adjusted income.

Below is a great chart that illustrates this point well. Generating $50,000 a year in cash flow used to be worth between $2 – $3 million. Now it’s worth over $8 million thanks to lower rates!

The value of San Francisco real estate cash flow has gone way up

Given the value of cash flow has gone way up, and rental property prices in San Francisco have either remained flat or gone down, savvy investors are beginning to buy rental properties now.

Please note this is different from single family home prices. Single family home prices are strong. Below is an example of a single family home in West Portal that sold for $455,000 over asking on 9/23/2020. Before the pandemic, it probably would have sold fo about $2 million, or a little over $1,000/sqft.

I’ve been keeping track of other great home sale examples in San Francisco during the pandemic here.

8) Tech firms are cutting salaries if workers relocate.

Few want to take a 10% – 20% pay cut to move to a different city and state when you can just relocate within San Francisco and save 20% – 40% on housing cost AND keep your salary the same.

Only if you have family elsewhere or you were already struggling to make it in San Francisco would you move away and take a pay cut and miss out on promotions, pay raises, and job opportunities when there is a vaccine.

The irony is that many San Francisco residents are happier with more flight. Less people make city living easier. As the population spreads out more evenly across the city, lifestyles get better for everyone who remain.

Fortunes Will Be Made In San Francisco Real Estate

With rents down in San Francisco, there is an opportunity to buy rental properties that are priced below pre-pandemic levels. When the inevitable V-shaped recovery happens in 2021+, investors are going to be richly rewarded with high real estate prices and higher rental prices. There will be a rush to buy after things are “all clear.” But to get rich, you must take risks before you know things are certain.

Single family properties in San Francisco will likely continue to do well. I have profiled many households who share their reasons as to why they are buying. The irony is that the more people who leave San Francisco, the more people are willing to pay for real estate.

With so much wealth made in tech stocks during the pandemic, money is going to continue to chase the San Francisco and Silicon Valley real estate market. San Francisco real estate prices are going to continue to go up for the foreseeable future.

The great migration to the western side of San Francisco is real. If you are looking to buy real estate in San Francisco, I would buy a single family home in Golden Gate Heights, Richmond, Sunset, West Portal, and Parkside. The city is fanning out and you want to get ahead or ride on this multi-decade trend.

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