The Local Lowdown: January 2023

Michelle Kim | January 1, 2023

The Local Lowdown

Quick Take:

The Silicon Valley housing market has cooled considerably in the second half of 2022, a trend that will likely continue through the winter months.
The decline in demand has opened more opportunities for buyers in the market this winter.
Months of Supply Inventory indicates the market remains a sellers’ market, although trending closer to balanced.

Note: You can find the charts/graphs for the Local Lowdown at the end of this section.

Entering the holiday slowdown

As we mentioned in the Big Story, the market is cooling on both the buy and the sell sides. When there are fewer sellers, there are also fewer buyers, because some buyers are selling their homes to move to others in the same market. New listings have declined faster than sales, causing inventory to decline near the all-time low level we experienced last winter. However, the key difference is that fewer buyers are on the market — so, even with low inventory, buyers can still find the home that’s right for them. The low inventory has insulated prices from a major reversal. Although prices have contracted, they have maintained price gains over the past 24 months with the exception of San Mateo condos, which are now lower than in November 2020.

Moving forward, prices will likely contract slightly more through the winter, which is typical. Without any signs of interest rates dropping, we’re 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.

Inventory continues to decline, following seasonal trends

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. Silicon Valley, 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, 10,869 single-family homes and condos sold. During the same period this year, 7,566 homes sold, a 30% 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 still indicates a sellers’ 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 (from a sellers’ market toward balance) since spring, but despite the changing market environment, Silicon Valley is still in a sellers’ market for single-family homes and condos.