It is human nature to strive for the best, be the best, and as this attests itself in real estate investment philosophy, with the desire to buy premium properties in class “A” locations. In normal market conditions this is a sound approach, however in this current environment, investors are best served by lowering their standards to obtain the best values. Properties in many core downtown markets have adjusted very little, while suburban towns outside major metropolitan areas have deteriorated acutely.

Using the San Francisco MSA as an example, California Association of Realtor (CAR) statistics released for June 2008 indicate a year over year decline of 4.3% for San Francisco proper. Comparatively, the median selling price in Vallejo, California, a suburb about 30 miles outside of San Francisco, has decreased a much more dramatic 37.3% year over year. Vallejo is accessible to San Francisco via public transportation including frequent commuter bus routes, Ferry access, casual car-pool access, direct access to I-80 and BART access from the Richmond, California station however Vallejo is experiencing much more pronounced depreciation in housing values compared to San Francisco.

There are several factors that may be contributing to this divergence. The first is a higher foreclosure rate. Working class suburban areas were highly concentrated with sub-prime loans, many of which were not underwritten with prudent lending standards. Consequently, the foreclosure rate in these areas is high and the huge supply of homes on the market suggests that the supply greatly outnumbers the qualified buyers

For example in Vallejo, CA the number of bank owned homes is 1009 according to RealtyTrac, Inc from July 7, 2008. Realty Trac also reported 1092 properties in pre-foreclosure status. Based on statistics from the US Census Bureau (2000 Census figures) there are 41,219 housing units in Vallejo therefore approximately 5.1% of housing units are in foreclosure or are bank-owned. Of course the number of housing units also includes apartments, and rental housing therefore this is not a measure of the foreclosure rate. Conversely in San Francisco there are 276 bank owned homes and 551 in pre-foreclosure. The total supply of housing in San Francisco is 346,527 (2000 Census figures) therefore approximately two-tenths of 1% of housing units in San Francisco are in foreclosure. As a note, RealtyTrac statistics may establish an outside limit on the number of pre-foreclosures because homes with a first and second mortgages could be duplicated in the statistics if the both the first and second loan are in default.

Home ownership rates were higher in the suburbs prior to market weakness, therefore many of the buyers who could buy had bought already suggesting fewer capable buyers were on the sidelines waiting to buy a home. In San Francisco the home ownership rate in 2000 was 35% as reported by the US Census Bureau. Conversely the ownership rate in Vallejo was 63.2% at the same time and from the same source. As market fundamentals adjusted there were many buyers on the sidelines in San Francisco, while in Vallejo which already was experiencing a high rate of home ownership, there were few.

Furthermore, owning and managing real property requires a commitment to the activities associated with management. Many well capitalized investors are focused on pride of ownership locations which is additional explanation why the pool of qualified buyers in working class suburban neighborhoods relatively thin. There is a perception, which is probably well deserved, that properties in working class neighborhoods carry a higher management burden due to older effective age, additional deferred maintenance and a more transient tenant base.

These arguments aside, investors must chose properties and locations that suite them. Real estate investing is not for everyone and requires active management. However, with supply and demand of properties tilted in the buyers favor, those with the financial wherewithal to acquire properties in this market may be rewarded.

About United Investors

Brian Topley, CCIM is Chief Investment Officer of United Investors real estate investment advisors based in San Francisco, CA. United Investors advises individual and institutional investors in the purchase, leasing, management and disposition of bank owned/foreclosure properties. He may be reached at http://www.unitedinvestors.com Sign up for United Investor property alerts at http://www.unitedinvestors.com/investor_signup.php

This information is intended merely to be a general discussion, not deemed to be investment or legal advice. Real estate investments are not suitable for all investors and involve significant risks. Individual investors should consult their tax advisor, CPA, and financial advisors prior to making any investment decisions.

Useful Links:

Are you dreading those payment reminders through the post? Taking out a short term loan can come in handy.