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!
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. 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.
Will Rising Interest Rates Cause a Crash in the Housing Market?
Interest rates are going through the roof just in time for the Spring housing season, does that mean the market here in the Bay Area is finally shifting? The short answer to whether a market shift or collapse is coming to the Bay Area housing market is no. Especially not anytime soon. While many casual observers are seeing a housing bubble In the Bay Area much like prior to the subprime crisis in 2008, the reality is that the fundamentals now are completely different now than they were in 2008. Let’s start with supply and demand. In order for the market to reverse there will need to be some combination of a substantial increase of supply and a significant reduction in demand. To put into perspective where things are right now, let’s look at the absorption rate which is the best measure of supply and demand in real estate. The absorption rate measures the number of sales against the number of available properties in a given period, with any rate in excess of 33% generally defined as a seller’s market. In March, the absorption rate in San Mateo and Santa Clara counties for pended sales closed the first quarter at 128.3%, soaring to 175.2% in March. The last time the quarterly absorption rate fell below 33% in those combined counties was in 2011. As the absorption rate shows, a substantial amount of upheaval in the current market will need to take place to change the dynamics of the market. Given that, let’s take a look at interest rates. As of April 11th the average 30 year fixed mortgage rate sits at 5.25% according to Mortgage News Daily. That’s up over full point in just a month and marks only the second time the rate has exceeded 5 percent since 2011. The jump in interest rates has been swift and was triggered by a quarter point increase of the federal funds rate by the Federal Reserve in March. Buckle your seatbelts because the Federal Open Market Committee now expects to raise the rate at each of its six remaining meetings this year. So, are the rising interest rates enough to cause an upheaval in the market? There will certainly be an impact on the demand side, but let’s look first at the supply side where inventory is currently extremely low and has been trending downward. Year over year monthly inventory throughout the Bay Area has fallen 27 months in a row. Let’s compare with what happened in 2008. In 2008, there was an influx of supply that hit the market due to foreclosures and short sales and demand simultaneously dried up as subprime lenders collapsed and access to credit became harder. Mortgage rates throughout the 2000s were between 5 and 7 percent, much higher than they have been for the last decade, particularly recently where we have seen record lows within the last 2 years. In the 2000s risky adjustable rate mortgages with balloon payments were prevalent, they are not right now. In stark contrast to the last bubble, homeowners now are predominantly locked into fixed rate mortgages at record low rates as many have taken advantage of refinancing opportunities. Due to appreciation and enhanced lending standards, most homeowners now hold a substantial amount of equity in their homes. In 2008 many homeowners were underwater and facing balloon payments that they couldn’t afford. In contrast, today, homeowners have substantial home equity and are locked into mortgage payments that are well below the current market rate. In essence, many are locked into a standard of living that they wouldn’t be able to afford on the open market. With no external pressure to sell, the question becomes, where is the additional supply going to come from? Sellers who need to finance a new property will likely face paying rates 3 plus points higher than their current payment, plus the possibility of a large capital gains tax bill. In that aspect, the interest rates could potentially depress supply. Sellers moving out of the Bay Area to cheaper markets are the strongest candidates to sell, but that’s already the case. Same with sellers looking to downsize and use their equity to pay cash on their new property. Perhaps others could sell to gain access to liquidity given the high rates and investors could take advantage of 1031 exchange sales. Even so, a large increase in inventory doesn’t appear to be forthcoming. On the demand side, the people who are most impacted by the rate increases are buyers who need financing to enter the market or move to a more expensive house. These are precisely the people who are disproportionately losing out currently in bidding wars, and the rates may push these people out of the market, and perhaps out of the area completely. Some buyers looking to purchase second or third homes by taking advantage of low interest rates which was a feature, particularly during the pandemic will likely leave the market as well, those a good number of these buyers could choose to pay cash for these homes. While the exodus of these buyers from the market will soften it somewhat, given that supply is likely to remain extremely low, how much of an impact will it truly have? Investors who have been very active recently figure to continue to be active because real estate is considered a good hedge on inflation. On a broad scale, while I expect absorption rates to fall as interest rates increase and the pace of home appreciation to slow, I don’t expect there to be a major correction in the housing market. There’s simply too little supply and too much intrinsic demand here in the Bay Area. I do expect the market to soften, and potentially decline in some areas as a result of the interest rate increases. Areas of the Bay Area with lower general demand, particularly those where demand is high for second and third homes could soften. The condo market, which is already comparatively weak, is likely to soften significantly. Some areas in the East Bay which are the tip of the spear for entry level home buyers may also suffer from reduced demand. For buyers who are looking to get in the market, I strongly encourage you not to wait hoping for the market to crash. If you can afford to buy now, you should do so and get in the market before the increasing rates price you out completely. Interest rates are trending upward and will continue to do so for the foreseeable future. While today’s 5 percent rate doesn’t look good compared to the rates in the 2 percent range last summer, it is likely to look pretty good by the end of this year where rates could be in the 7 percent range. Sellers remain in the driver’s seat. Due to changing market conditions I wouldn’t expect the same rate of appreciation over the last few years, particularly on entry-level homes. If you have an entry-level home, now may be a time to consider selling as you’re close to the top of the market, but it depends on your cash position and your goals. If you’re thinking about leaving the area, now is the ideal time to sell in my opinion. At this point, if you sell, you will get a premium for your home.
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