Bay Area Real Estate Market Update - August 2022
Is the Bay Area real estate market really shifting? Is it about to crash? Let’s dig deep into the market to separate the hype from reality and find out what’s really going on right now in the market.
The perception right now is that the market is shifting and the data supports that perception. With that said, context is extremely important in order to properly evaluate what’s happening and weed out the hyperbole. The reality is that the shift that we’re experiencing now is a return from an extreme seller’s market to the type of seller’s market we have experienced for the better part of the last 10 years.
The shift can be seen across many metrics, but let’s start with the absorption rate. Focusing on single family homes in San Mateo and Santa Clara counties, the absorption rate, measuring pending sales versus inventory, has precipitously fallen as interest rates have risen, going from 203.7 percent in March to 58.9 percent in July. Keep in mind, traditionally, anything above 33 percent is considered a seller’s market. For perspective, the absorption rate in the same area in the first quarter of 2008 was at 10.2 percent.
The perception right now is that the market is shifting and the data supports that perception. With that said, context is extremely important in order to properly evaluate what’s happening and weed out the hyperbole. The reality is that the shift that we’re experiencing now is a return from an extreme seller’s market to the type of seller’s market we have experienced for the better part of the last 10 years.
The shift can be seen across many metrics, but let’s start with the absorption rate. Focusing on single family homes in San Mateo and Santa Clara counties, the absorption rate, measuring pending sales versus inventory, has precipitously fallen as interest rates have risen, going from 203.7 percent in March to 58.9 percent in July. Keep in mind, traditionally, anything above 33 percent is considered a seller’s market. For perspective, the absorption rate in the same area in the first quarter of 2008 was at 10.2 percent.
Virtually all of the drop in the absorption rate results from a reduction in demand as interest rates took off from an average of 3.9 percent on March 1st to 5.6 percent on August 19th with a peak of 6.28 percent in June. The supply side continues to be very tight with the number of new listings Bay Area wide in July off nearly 20 percent year over year. In fact, the number of new listings on the market has declined year over year for 12 consecutive months. A falling absorption rate despite fewer new listings points to a substantial reduction in demand.
Taking a look at metrics that are more indicative of what’s happening on the ground, the shifting dynamics of the market as well as the fact that we remain in a strong seller’s market are both apparent. Bay Area wide, the sales to list ratio in July fell to 104.5 percent from 109.5 percent in June and the median days on market increased by 3 days to 14. In April, the sales to list ratio peaked at 116.5 percent with a median days on market of 8. That means that homes are taking nearly twice as long to sell as they were at the peak of demand and that homes are selling much closer to list price. Both are indicators of reducing demand and adjustments being made to pricing and marketing strategies.
Looking at county data, it’s important to note that in every Bay Area county, the average home is still selling above list price in 3 weeks or less. Both are indicators of a market that still favors sellers, though demand has fallen off to a level closer to the available supply due to money becoming more expensive.
In terms of median price, values fell across the Bay Area from June to July, with the largest drop occurring in San Mateo county with the median price dropping to $1.8 million from $2.048 million in June. The median home sales price in San Francisco also fell to $1.67 million. Median prices throughout the Bay Area have been trending down since their peaks in April, and while falling prices are certainly alarming for home owners, it’s important to put those numbers in context. The median home in the Bay Area in July sold for more than 20 percent more than pre-pandemic levels.
So what’s happening on the ground? The most obvious thing is that homes are now selling and being evaluated at closer to list price than they had been. The falloff in median sales price correlates well with the reduction in sales to list ratio, meaning that buyers are no longer paying as high a premium above list price as they were at the peak of the market. In San Francisco and Alameda, we’re still seeing sales to list ratios closer to 110 percent. Those numbers are off 10 to 15 points from their levels in April. The buyers who are still in the market are evaluating homes closer to the list price and are less concerned about getting into bidding wars. We’re also seeing more below list offers and more contingent offers, meaning getting a property ready to sell is as important as ever to sellers.
Where do we go from here? Interest rates are likely to continue to rise, which may further stifle demand and push people out of the market. I believe median prices will begin to stabilize as buyers and sellers get acclimated to the new conditions of the market and we settle into a more normal market. I don’t see the conditions necessary to precipitate a collapse of the market, particularly in the Bay Area where homeowners hold lots of equity. With money more expensive, there will be fewer buyers, and with homeowners holding lots of equity and mortgages at historically low rates, inventory will likely remain low, meaning reduced volume until we see either a significant reduction in rates or an event which leads many people to sell. Neither appears to be on the horizon right now.
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