We are currently experiencing the hottest seller's market in the last ten years. Even when inventory increases in the spring, it looks as if the multitude of buyers will continue to outnumber the availability of homes in the area. Competition among buyers has resulted in multiple offers and rapidly rising prices. 

Although most experts forecast a continuation of the real estate bull run for all of 1999, no one knows how long this seller's market will continue.  Past patterns, nevertheless, demonstrate that real estate goes through predictable cycles. 

History often repeats itself, but we do not always pay attention. Many people treat "today" as though it will never change. Both buyers and sellers need to factor this reality into decisions they make in this supercharged environment.

Looking back

Bay area residential real estate activity reached its apex at the end of the 1970s and, again, at the end of the 1980s. The ten-year cycle is repeating itself in the last years of the 1990s. 

During our last significant upturn, the market peaked in the latter part of 1989. At the time, of course, we did not know we had reached the high point. It was only later that we could look back and be sure. 

Prices rise quickly, drop slowly

In particular, one trend stood out quite clearly—despite diminishing sales activity in the early 1990s, prices generally remained high until 1993. I know many people in this area who bought between 1990 and 1993. Those who still own the home have seen the value of their property elevated to even more than they paid. A substantial number of people, however, who became homeowners between 1990 and 1993 and sold before 1997 lost money on their purchase. 

Waiting won't work

For you, as a buyer, one possibility is to hold off until prices stabilize or decrease. Unfortunately, you may be waiting three or four years before there is any sizeable drop in prices. With current sky-high rents, this may not be a reasonable alternative for many of today's buyers. In addition to the tax advantages, having one's own abode offers psychological as well as physical benefits. Owning a home is an achievement.

Buy with caution and common sense

Few buyers are clear on the relative value of various neighborhoods, as well as pockets within them. To understand how much to offer, you must know the territory. An experienced, local real estate professional can provide invaluable service and advice in this regard. I am familiar with numerous instances from the early 1990s where those buyers who overpaid were working with out-of-area agents. Even if he or she is your relative or friend (or, perhaps, especially for this reason), this is a bad idea.

Location is still the key determinant of value. Other aspects are the size and style of the home, floor plan, charm, condition, remodeling and upgrades, quality of construction, outdoor living, number of steps, schools, proximity to shops and transportation, quiet vs. noisy, view, privacy and condition of nearby properties.

Price per square foot

Even though list (asking) prices are not set strictly on the basis of square footage, I strongly recommend that buyers take into consideration the price per square foot. This quickly gives a basis of comparison.

For example, it would be useful for you to know that few of the upper-end new homes in the Oakland and Berkeley hills sell for much more than $300 per square foot. A top-of-the-line, new, 3700 square foot house with a fabulous Bay view might sell for $1,000,000 to $1,200,000. At the higher price, this is $324 per square foot.

What if you are one of 12 buyers bidding on an 1100 square foot property listed at $305,000? You love the house, but how much should you offer? At the asking price it comes to $277 per square foot, already a high number. But with all this competition, the highest bid could exceed $400,000, more than $364 per square foot. Does it make sense for you to enter the bidding? These are the kinds of questions you need to ask yourself in this seller's market.

Interestingly, a friend who is a Realtor in San Francisco told me the other day of houses in the 1000 square foot range in the best areas of the City going for $600 per square foot. It may be that even the highest East Bay prices are a bargain after all.

Sellers and agents need restraint

We are in the midst of a vicious cycle: you, as a seller, see your neighbor's house sell for $400,000. You feel your home is much better and must be worth more. This may not be a totally objective observation on your part.

Your agent wants the listing and fears you will list with someone else unless he goes along with your price. In this crazy market, you might even get it. You may have, however, ended up with an even higher price if you had listed lower. Why? Because, assuming full marketing and exposure, a price perceived as low will engender competitive bids.

Besides price, the other reason for you as a seller to act with restraint is the possibility of better terms from the buyer. As an example, if you have a $7000 pest control (termite) report and you receive multiple offers, one or more of the buyers could offer full price or more and accept the pest control "As Is".  This would result in an additional $7000 in your pocket. 

Also, in competitive bidding, buyers tend to be more flexible about when you will give possession (allow the buyer to move in). This could be very helpful in easing your move.

Final thoughts

Like the stock market, real estate sales and prices could continue their upward march in defiance of past trends. A continuing strong economy, combined with low interest rates could fuel a much longer-than-expected seller's market. 

Regardless of its direction, the market is neither good nor bad; it just is. Buyers and sellers need to understand it in its historical perspective and where we are in the cycle.

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