In San Francisco, housing is always in demand. Housing prices moved higher despite falling inventory, which is unusual for housing, but typical in a classic supply/demand problem: as supply falls and demand remains steady or increases, prices rise, which is essentially what happened in San Francisco this year. However, housing typically works a little differently. In the first half of the year, new listings usually rise rapidly, far outpacing sales and causing inventory to rise from the winter lows. Demand also tends to rise in the first half of the year, and the increasing supply actually benefits the overall market because buyers can more easily find a home that suits their wants and needs. Finding the right home is far more valuable than feeling forced into a home that’s not right, so prices tend to rise in the first half of the year.
We don’t expect home prices to hit new peaks this year, and possibly not for the next two to three years. The supply problem in San Francisco shows no signs of waning, which creates the conditions for fewer sales and slower price growth.
Inventory fell further as sales outpaced new listings
Single-family home and condo inventory has been trending lower for the past 12 months, with condo inventory hitting a two-year low in June. Inventory showed some initial signs of growth in the first quarter before declining in the second quarter. Sales grew from January to May but fell in June, while new listings declined for the third month in a row. Additionally, inventory, sales, and new listings are all significantly lower than last year. The number of home sales is, in part, a function of the number of active listings and new listings coming to market. Even though new listings are at a depressed level, any amount of new listings positively affect sales. Potential sellers who have fully paid off their property are in a particularly good position if they don’t have to finance their next property after the sale of their home. Since January 2023, sales jumped 100% while new listings fell 41%.
As buyer competition has ramped up and sellers are gaining negotiating power, sellers are receiving more of their listed price. In January 2023, the average seller received 96% of list price compared to 102% of list in June. Inventory will almost certainly remain historically low for the year, and the market will remain competitive in the third quarter.
Months of Supply Inventory remained low in June
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). The San Francisco market tends to favor sellers, at least for single-family homes, which is reflected in its low MSI. However, we’ve seen over the past 12 months that this isn’t always the case. MSI indicated that single-family homes and condos began the year in a buyers’ market. MSI has declined sharply since January for both single-family homes and condos, indicating that the climate has shifted from a buyers’ market to a sellers’ market for single-family homes and a balanced market for condos. The sharp drop in MSI occurred due to the higher proportion of sales relative to active listings and less time on the market.
