Prices may contract further before reversing
We have enough data to show that the housing market in the Bay Area is cooling substantially after one of the hottest real estate markets in history. However, demand in the Bay Area is somewhat evergreen. People simply always want to live here. Of course, you don’t have to be a real estate expert to realize that when interest rates shoot up, fewer buyers will be in the market, which generally puts less upward pressure on prices. Single-family home and condo prices have declined from their peaks reached earlier this year with the exception of Contra Costa and Napa condo prices, which reached new all-time highs and are likely statistical outliers rather than the start of a new trend. Moving forward, prices will likely contract slightly more through the rest of the year, which is typical during the slower holiday season. Home prices in the Bay Area grew at an unsustainable rate, and a contraction is a normal response to that sort of growth. We are now entering a stage of slower longer-term growth — but still growth. In the short term, prices may come down a little more, however. 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, which makes for a much healthier market than what occurred in 2020 and 2021.
New listings decline faster than sales, dropping inventory further
Single-family home and condo sales and new listings declined month-over-month, a trend that will likely continue through the rest of the year. The Bay Area, along with the rest of the country, has not returned to pre-pandemic inventory levels after the buying boom last year. Now that we’re through most of 2022, we can see just how significant sales were in 2021 by comparison, especially in the summer months. From May through September of last year, 35,511 single-family homes and condos sold. During the same period this year, 25,595 homes sold, a 28% decline. Far fewer new homes have come to market in 2022, and the rising rate environment has dropped demand as well. We can tie new listings not only to supply, but also to demand, because sellers are often buying, too. Softening demand has brought the market closer to balance despite declining inventory.
Months of Supply Inventory implies a balanced market
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). MSI has trended higher (toward balance) since the spring due to the changing market environment. However, we are still in a sellers’ market for most of the Bay Area, as demand for homes has remained high relative to supply. Currently, MSI indicates a balanced market for Napa condos and a buyers’ market for Napa single-family homes and San Francisco condos.