• Silicon Valley’s housing market is cooling after a huge appreciation over the past two years.
• New listings are on the decline, while sales are strong, which will further reduce inventory as we head into winter.
• Months of Supply Inventory indicates that the market is still favoring sellers despite the higher mortgage rates.

When we consider the increases in mortgage rates and normal seasonal trends this time of year, when prices tend to stagnate or decline slightly, the slight price contractions that homes experienced since their peaks reached earlier this year aren’t alarming in the slightest. Yes, we are moving into a new chapter in the housing market that doesn’t involve astronomical price increases and 20 offers the first day the home gets listed, but that’s actually a good thing. Home prices in Silicon Valley grew at an unsustainable rate, and a slight contraction is a normal response to that sort of growth. For example, single-family home prices in Silicon Valley were on pace to double every three years at the 2021 growth rate. We are now entering a stage of slower growth — but still growth. Real estate has shown itself to be one of the best investments in recent history and is, on average, the largest store of wealth for an individual or family. Price appreciation will likely move to a more normal growth rate of around 5-6% in the coming years.

Sales increased month-over-month, while total new listings declined. This caused inventory to decline further, a trend that will likely continue through the rest of the year. Silicon Valley, along with the rest of the country, has not returned to pre-pandemic inventory levels. Homes have generally sold faster over the past two years, making new listings more and more important to the market. Inventory generally grows when new listings increase or homes sit on the market. With rates rising at such a rapid pace, new listings are slowing considerably, having dropped 26% from the second quarter of 2022 to the third. Last year, they only dropped 11%. We can tie new listings not only to supply, but to demand as well, because sellers are often buying, too. Softening demand has brought the market closer to balance despite low inventory.

Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes listed on the market to sell at the current rate of sales. The long-term average MSI is around three months in California, which indicates a balanced market. An MSI lower than three indicates that there are more buyers than sellers on the market (meaning it’s a sellers’ market), while a higher MSI indicates there are more sellers than buyers (meaning it’s a buyers’ market). From April to July, MSI climbed higher (toward balance) in Silicon Valley, but MSI fell in August and September, indicating we are still in a sellers’ market.