Bay Area Real Estate Market Update - January 2023

Nobody wants to buy and nobody wants to sell, that’s the story of the Bay Area housing market entering 2023.  So who benefits and where do we go from here?

We’re at a very interesting time in the housing market in that we’re in a bit of a stalemate.  Many buyers have exited the market because high interest rates have made homes considerably less affordable for anyone needing a loan or wanting to finance their purchase.  With fewer buyers in the market, conventional wisdom holds that we’re now in a buyer’s market.  While it’s certainly the case that the market is more friendly to buyers than it was in the early part of last year, inventory remains low and absorption rate statistics suggest that in most parts of the Bay Area, we remain firmly in a seller’s market.

Why is inventory low?  Because many homeowners refinanced over the past several years and have mortgage rates on their homes at half or lower than half the average current rate for a 30 year fixed mortgage, which is 6.14%.  So generally, unless there’s an external motivating factor, sellers are holding on to their properties.

With low demand and low inventory, that means there are opportunities in this market for both buyers and sellers.  Buyers have the ability to be more choosy about the home they plan to buy and in many cases, have leverage to negotiate the purchase price, get contingencies and extract concessions from sellers.  That’s particularly true if the sellers cut corners when putting the home on the market, or if they overpriced their home.  Those properties are the ones that have been sitting for a long time.

On the other hand, due to the lack of inventory, the sellers who do prepare their home well for sale, get pre-sale inspections and price the home in line with the market are also very well positioned and doing well in this market.  Quality, well-priced homes are still in high demand in this market and are selling quickly, often above list price.  The reason comes down to supply and demand and their value in this scarce market.

Those who are perhaps best positioned in this market are cash and institutional buyers who are not substantially impacted by the high interest rates and are well positioned to benefit from home prices that have come down from their peaks.  Cash buyers are also very well positioned to negotiate with sellers.  I anticipate lots of resale homes in 2023 being gobbled up by institutional buyers and investors, many of which may never return to the resale market.  That could depress inventory for years to come.

Looking at statistics across the Bay Area, focusing on San Mateo, San Francisco, Marin, Alameda, Santa Clara and Contra Costa counties, December 2022 was a bit of a milestone as it was the first month since March of 2012 that the sales to list ratio for single family homes dipped below 100% across the region, coming in at 99.8%.  Regional median days to sell jumped to 23 from 18 in November, its highest level since January of 2020.

Looking at the data by county, San Francisco and Alameda county both had sales to list ratios exceeding 100%, while the remaining counties fell below that mark.  That said, every county in the region had sales to original list price ratios below 100%, with San Mateo and Santa Clara counties at the bottom at 95.3%.  That suggests that price reductions are becoming the norm in this market which is considerably different than the typical environment of overbidding.  Median days to sell peaked in Marin at 33 days, with single family homes in Santa Clara selling in a median of 17 days, the lowest in the region.

Median sales prices as well as price per square foot numbers are also considerably down from their peak levels.  San Mateo topped median prices for single family homes in Q4 in the Bay Area, at $1.728M.  That’s 18% off from the peak of the market of $2.1M in Q2 of 2022.  Price per square foot in San Mateo county was $1089 per square foot in Q4, off 17% from the peak in the second quarter.  Year over year, the numbers aren’t quite as bad as there was a 9% reduction since Q4 of 2021 in median price and price per square foot.

Those numbers are mirrored throughout the Bay Area.  Q4 median prices in San Francisco were 21% off their peak in the second quarter and down 13.5% year over year.

Again, context is required when looking at these numbers because low interest rates led to a surge in demand during the pandemic, so housing prices soared due to rising demand and limited supply.  So while the falloff from the top of the market has been precipitous, the floor has certainly not fallen out of the market. 

Q1 of 2020 was the last quarter prior to the pandemic.  The cumulative rate of inflation since that point was 13.1% which is substantial and has led to the increased interest rates.  Adjusting for inflation, the only Bay Area county of the six measured that did not outperform inflation since the beginning of the pandemic with single family homes was San Francisco county.  Everywhere else, values have outperformed inflation.  That is generally why real estate is generally thought of as a good hedge against inflation.

The condo market throughout the Bay Area has largely mirrored the single family housing market, although condos typically sit on the market longer than single family homes.

While many people think that we’re in the midst of a crash of the housing market, that simply is not the case.  Low inventory is keeping values up even as demand has tapered off.  I expect an uptick both in inventory and demand in the Spring as more stable interest rates are beginning to bring buyers back into the market.  The floor never really fell out of the market nor does it look to – there has simply been a bit of a reversion to the mean after a period of record demand spurred by record low interest rates.

If you have something to say, please drop a comment below or email me at sean.engmann@cbrealty.com.  If you’re thinking of buying or selling and would like for me to help, please give me a call at 650-238-9210. Thanks for your interest, and I look forward to connecting soon!