Hot Take: San Francisco Homeowners and Buyers Should Trade Up Now While the Market is Down

When San Francisco real estate is down or in a “buyer’s market,” it’s actually the perfect time for current SF homeowners and first-time homebuyers to trade up to a more expensive property while the market is down.

This may sound like “Realtor spin” to some of you. If your mind is made up that it’s a terrible time to buy or sell, this isn’t going to change it. However, if you’re in the group of folks who would like to move but aren’t sure if that’s a totally foolish idea or not, maybe this will help offer some perspective.

Investing Wisdom Behind Trading Up in a Down Market

In the past, during other softer real estate markets (yes, this is not the first one in the history of SF), I’ve blogged about how it is actually smart to trade up in a down market.

Exhibit A: But my San Francisco condo’s value is down. Why on Earth would I trade up now? Um, bc it could make you money!

Exhibit B: Is it smart to trade up to a nicer or bigger or ideally-located home in a buyer’s market?

(When you’ve blogged for 20+ years, it all comes back around…)

It’s widely regarded as investing wisdom that you make your money on the buy, which basically means that the purchase price of an asset is the single most important factor when it comes to your end-of-the-day profit.

However, in residential real estate, most regular homeowners (not professional investors) focus more on the value of the home they are selling, rather than focus on the market value of the home they are buying next. In my opinion, you want to look at both—the big picture.

A zoomed out aerial view of San Francisco real estate at dusk, illustrating the idea of seeing the full picture when you trade up or upgrade homes in a down or buyer's market.
Wondering when to trade up and upgrade your San Francisco home? Consider the full picture—you’ll likely make more money when the market is down.

The Simple Math Behind Trading Up

For example, if the San Francisco real estate market goes down 10% and your current home was worth $1.5M before the downturn, it is now worth ~$1,350,000—a loss of $150k. But the home you want to buy was worth $3M before and is now worth $2.7M—a loss of $300k. In this example, trading up your San Francisco home after the 10% drop would offer an additional $150k in benefit over selling and buying the same homes at their peak market price.

Of course, different homes go up and down at different rates, but if there is a softening of the market like we’ve seen this year in 2023, most real estate is affected relatively evenly, especially among the same property types (ie. single-family homes move up and down together).

So, it’s often advisable to worry less about how much your current San Francisco home has dropped in fair market value and focus more on whether or not there is a value to be had in the trade-up home you want—especially if you want to buy a better home in a better location, because these homes are the ones most likely to jump in value when the market rebounds.

Interest Rates vs. Market Prices: What to Consider When Upgrading Homes in San Francisco

Okay, so what about the effect of higher interest rates? One of the lenders we work with, Susan of Wells Fargo, shared the following example of why it might make sense to buy a home at today’s higher interest rates, instead of waiting for rates to come down.

Basically, she is saying that you will save more money on the lower purchase price, even after accounting for the higher monthly interest payments, rather than waiting for rates to come down. The reasoning is that, as rates come down, more buyers will jump back into the market, thus causing prices to go up. Here is her example:

  • In the red-hot seller’s market of 2020/2021, a San Francisco home listed for $2,300,000 likely sold in the $2,600,000 range or higher. With 20% down, at prevailing low mortgage rates, the loan amount of $2,080,000 meant a monthly payment of close to $8,000.
  • In 2023, this same San Francisco home listed for $2,300,000 is likely selling in the $2,350,000 range. With 20% down, at today’s higher rates, the loan of $1,880,000 is a monthly payment of roughly $12,500. That’s a $4,500 higher payment per month.

If you multiply the $4,500 more per month that you’re paying from a higher mortgage interest rate, by 36 months or 3 years, then you’ve spent $162k over the 3-year period for the higher rate. This assumes it will take 36 months to see lower interest rates, which is a very conservative approach (most predictions are 12 to 24 months for interest rates to come down).

But in this example, if you’ve saved $250,000 on the cost of the property, plus another $9,000 saved in lower property taxes, you are still in a more advantageous position than if you had purchased in 2020/2021 with low rates—and your appreciation will be greater when the market fully recovers.

Time to Trade Up Your San Francisco Home?

Again, this argument isn’t going to change the mind of someone who feels that sitting on the sidelines is the smart move right now. As long-time top San Francisco Realtors working down “in the trenches” with buyers and sellers, and speaking with our past and prospective clients, we know that many would-be buyers feel this way.

From fence-sitters to professional lenders to our team of specialists at Danielle Lazier Real Estate, everyone expects demand to increase as rates go down. Is it so crazy then to think that it’s wise to trade up in a down market? Of course, you have to be able to afford the higher payments, which is not an insignificant factor. But if you’re kicking yourself for not moving a couple of years ago, maybe this analysis is some salvation for you.

As always, please reach out to me to discuss your particular situation and come up with a plan. Also, sign up for our newsletter to stay up on all our latest insights and market updates. No spam or games, your inbox is safe with us! Share your email address below, and let’s talk soon.

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