San Francisco’s Condo Market on Upswing Again After June’s Decline

an Francisco--The economic crisis did not bruise San Francisco as badly as certain other major California cities like Los Angeles and San Diego, so its condominium market has not fared as poorly during the downturn.

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San Francisco–The economic crisis did not bruise San Francisco as badly as certain other major California cities like Los Angeles and San Diego, so its condominium market has not fared as poorly during the downturn. The city’s condo market, which appeared to be on the mend in the first quarter, sputtered in June and much of July, but now, according to a report by West Coast residential research firm, The Mark Company (TMC), it is back on the road to recovery.

The first quarter of this year had brought good news for San Francisco’s condo market. Sales of new construction units increased 11 percent year-over-year, and closed transactions for resale units skyrocketed 127 percent. The trend continued through the first two months of the second quarter, but in June, the numbers began to slip. “From the events in the Gulf of Mexico to the European debt crisis and perceived quagmire in Afghanistan, budding consumer confidence has been chipped away at,” Alan Mark, founder and president of TMC tells MHN. “The fear of job insecurity also resurfaced. People are hesitant to make big purchases despite extremely low interest rates.”

However, it seems the decline may very well have been an aberration as opposed to an indication of a change in trend. “During late July and early August, we have definitely seen an uptick in sales,” Mark says. “The Gulf crisis has abated and the other issues aren’t front page news for now. The feeling of job insecurity has also dissipated. Inventory is definitely dwindling.” Indeed, some of San Francisco’s largest condo projects–including the 650-unit Infinity, the 269-unit Arterra and the 246-unit Soma Grand–have recently sold out or are on the verge of selling out.

The city’s declining condo inventory is not at all likely to experience a growth spurt, and the contained supply will ultimately cause the price tag on units to inch higher. Not even the return of rented-out condos to the for-sale market is of concern as, particularly in comparison to Los Angeles, only a small percentage of condo units were put up for rent.

“San Francisco’s dwindling inventory will continue to affect pricing and developers’ decisions to enter the market with new product,” Mark notes. “Lower than normal inventory is expected to continue throughout 2010 and 2011 and as inventory continues to decrease, we will see less concessions offered, slowly followed by subtle increases in pricing in scarcer product type. Buyers will have fewer options. There will be virtually no new inventory under $1 million in approximately one year.”

While sales are on the rise again following the decline in June, a few factors will probably prevent the San Francisco condo market from recovering at a faster pace. “Unemployment will likely continue to be a factor,” he says. “It has decreased from the 10.4 percent it was at six months ago, but actually increased slightly over the past two months to 9.6 percent at the end of June. Also, the fact that interest rates will stay low, cuts both ways. Savvy buyers feel like it is a bargain to purchase with low interest rates–many of these buyers have had interest rates north of 7 percent or even in double digits in the past. Others now feel that there isn’t the urgency. Lack of buyer urgency is still one of the hardest challenges to overcome.”

Despite the hindrances, the future of the San Francisco condo market is promising. “San Francisco will always be a highly desirable place to live and have pent-up demand for housing,” Mark adds. “In the past, Baby Boomers were the major source of buyers. Over the past couple of years, Generation Y has become more of a major player. It is almost a barbell effect with two sizable demand pools for different products.”

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