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San Francisco Real Estate - Is it smart to trade up to a nicer or bigger or ideally-located home in a buyer’s market?

May 2, 2010

San Francisco Real Estate Conundrum: Is it smart to trade up to a nicer or bigger or ideally-located home in a buyer’s market?

Under many circumstances, it is smart to trade up in a buyer’s market. How can this statement be true? Let's look at an example.

Example:  Let's follow two San Francisco properties from peak to trough of a SF real estate market cycle.

  • Home #1 - The starter home: Inner Mission 1 Bedroom Loft Condo
  • Home #2 - The desired trade-up home: Noe Valley 2+ Bedroom Single Family Home

Scenario #1 – Real Estate Downturn, aka Buyer’s Market when home prices declined 10% from the peak

  • Home #1: At the top of the market:  $575,000. During the downturn:  $517,500.  That’s a $57,500 decrease.
  • Home #2: At the top of the market:  $1,100,000. During the downturn: $990,000. That’s a $110,000 decrease.

If you were to sell your starter home and buy the trade-up home during the buyer's market, you would actually save money, approximately $52,500.*

Not to mention, that the real reason you want to sell your loft and move into the single family home is that you’ve outgrown your current digs and are ready for a house in San Francisco or the Bay Area for you and the growing family.

So, yes, you’ll have to swallow the reality that your current Mission condo is worth less than it was at the market’s peak. But, you’ll be able to achieve a much more important goal – owning the right home for your current life circumstances.

But wait, there’s an added bonus. Check out what happens when the market recovers.

Scenario #1 – Real Estate Recovery = Home prices increase 10%

  • Home #1: During the downturn: $517,500. During market recovery:  $569,250 = $51,750 increase.
  • Home #2: During the downturn: $990,000. During market recover: $1,089,000 = $99,000 increase.

When the real estate market rebounds (and inevitably, it will), the trade up home, whether a nice house or spacious condo, is better positioned than the starter home for price appreciation. In this example, the single family home will appreciate $47,250 more.

When I counsel clients who are considering selling their current home so they can upgrade to a more spacious property in a new San Francisco neighborhood (or even to the East Bay, Marin, or Peninsula), I advise that they consider both sides of their transaction: the sale of the current home and the purchase of the new one. For most of us, it’s impossible to buy in a buyer’s market and sell in a seller’s market. So, look at the big picture, and do what’s best for you!

* This scenario assumes that you have the financial ability to purchase the new home (home equity, savings, stable employment).

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