#26 – Market Predictions for San Francisco, CA from the American Monetary Association

San Francisco CA: 5.2% Return on Investment (2011)

San Francisco is another major market area in the state of California that has experienced significant challenges.  The rapid escalation of market prices during the real estate bubble has compressed cash flow so severely that investors are almost certain to realize a net negative cash flow for each month of ownership.  In addition to this, many of the homes available for sale in the area are many decades old, and will require significant amounts of maintenance.  Approximately 56% of the inventory in San Francisco is coming from foreclosures[1].

San Francisco represents another area that will be an extremely difficult market for investors.  The  reason for this stems from the fact that returns from real estate investment in San Francisco come almost exclusively from value appreciation.  Since values were pushed so high during the bubble, the subsequent contraction has forced many investors to absorb high losses from the r

ecurring negative cash flows that accompany the imbalance between prices and rents.  For buyers who purchased at the wrong time, they are stuck in a bind, trying to hold onto their properties until the values bottom and resume a course of expansion.  Unfortunately, many buyers in San Francisco rode the value contraction down and have a long ways to go before they recover the losses from the financial crisis of 2008.

In addition this, the fundamental underpinning of San Francisco’s economy is facing an emerging difficulty.  This threat is unfolding as the technology industry is steadily migrating jobs out toward states and countries with a lower cost of labor and less burdensome regulatory environment.  The restrictive land use laws in San Francisco have made the market hyper-sensitive to changes in demand.  With very little new housing available, small increases in demand shoot prices upward and reductions in demand can send prices down quickly.  On balance, there are many markets that are far more healthy than San Francisco for both experienced and aspiring income property investors.

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