Nowadays the housing market in California is the worst nightmare for the United States. On one hand, it is the richest state that is a home for the best companies in the tech industry, generating millions of dollars each year. On the other hand, great employment rates led to the worst inequality in housing supply and demand, turning California in one of the least affordable places for living in the world.
A brief history of San Francisco Bay
San Francisco Bay is located in California and surrounded by the region, called Bay Area, with large cities like San Francisco, Oakland and San Hose. SF Bay is about 60 miles long and 3 to 12 wide, and it is connected to the Pacific Ocean by a Golden Gate Strait.
San Francisco Bay was discovered in 1769 by the Spanish exploration party headed by Gaspar de Portolà. Earlier this part of the country was inhabited by Native Americans, Ohlone people. The region was governed by the Mexican authorities until 1846 when the US purchased the territory.
SF Bay survived numerous events, such as the discovery of gold in California, the earthquake in 1906 and World War II. Nowadays San Francisco Bay is the home to the leading world Fortune 500 companies, like Apple, Facebook, and Google.
Housing costs in California
California is experiencing a significant housing shortage since the year 1970. The reason is the imbalance in supply and demand due to the fast economic growth, a large number of new jobs and the insufficient number of new construction houses. As real estate experts say, one housing unit was built for every five new residents.
The prevailing demand and the lack of housing influences the price rates. By 2017, the average price of the house in California was 2.5 times higher than the average prices in the U.S. Nowadays the median price of a Californian home equals about $600,000. California has four of the most expensive residential markets in the United States – Silicon Valley, San Francisco, Orange County and San Diego. The seventh place takes Los Angeles.
The real estate market in San Francisco is very competitive – one house usually receives two offers. The median price of the houses listed in SF is about $1.3 million. The experts estimate the appreciation of about +2.4% per year. The average return on investment compared to the purchase price is about 34%.
The purchase of the house for sale in San Francisco is not the only profitable way of investing. This region is suitable for the investors who are willing to focus in particular on long-term rental strategy.
Due to the high level of demand for properties for sale, and accordingly, the increased prices, it is cheaper to rent the property than to buy one. The city takes second place at the top of the most expensive cities to live in. The demand for the rental space is also quite high, so the median rental cost in San Francisco is about $4,500.
Despite the fact that the real estate in SF is incredibly expensive for investing, the returns are higher in comparison to the other world cities.
The so-called City of Angels or Los Angeles drew the attention of international buyers more than any other city on the globe. This city is considered to be one of the most desirable places to invest in over the last several years. The median listing price of the house in Los Angeles is $859,000, with the average appreciation of about +2.7% in one year. Los Angeles is in the top three of the cities with the greatest capital appreciation, along with Boston and Paris, according to past performance.
The demand for rental properties is increasing in Los Angeles due to the reason that more people prefer to rent houses than to buy because rent is a cheaper and more affordable option. Taking into account the high price of the properties for sale, the more suitable decision for investors would be to buy the property for rent instead of flipping.
San Diego is the second biggest city in California and one of the ten biggest cities in the U.S. The city is expanding at a dramatic pace, and it is among the most rapidly growing cities in the country. The real estate investors often prefer San Francisco and Los Angeles real estate supply over San Diego, so the buyers should not miss the opportunity to purchase the property in this market.
The main advantage of the market in San Diego is the healthy balance between the buyers and the sellers. The median listing price of homes in San Diego is about $699,900. The annual appreciation rate of homes in San Diego equals 5.62% which is one of the highest levels in the country.
Pros of buying a house in San Francisco
- A high return on investment. As we stated above, San Francisco has the sky-high rates of returns – about 34%. Moreover, this rate grows up every year – in 2019 it was 31.4 and in the year 2017 – 27.4 which is the highest return on investment index since 2006. In 2019 the profits from selling the house in San Francisco were higher than in 13 previous years.
- Great appreciation rate. The neighborhoods in San Francisco show remarkable growth in appreciation from year to year, and it is a good chance for real estate investors to gain profit.
- A strong demand. The real estate investor who has chosen the housing market in San Francisco would not be disappointed – there always are the people willing to buy a house.
Cons of buying a house in San Francisco
- Competitive market. The competition for housing in San Francisco is incredibly high due to the larger number of buyers in the market. It can be difficult to purchase the desirable property, as one seller receives at least two offers.
- Expensive properties. The housing market in SF is the priciest in the most expensive state, where the property costs more than one million dollars.
- High additional expenses. Homeownership requires additional expenses besides the down payment and the purchase price of the house. The other needed costs for maintenance, property taxes and renovation are also quite high.
Purchasing a property in the SF Bay Area may be a challenge for the real estate investor due to the high price, strong competition in the market and a low amount of housing supply. Nevertheless, the efforts will be rewarded with higher rates of returns and a great level of appreciation.