The Bay Area has started to trend similarly in terms of price growth, sales, and inventory, but San Francisco is an island unto itself when it comes to housing. Prices and inventory in the North Bay, East Bay, and Silicon Valley have increased considerably because more listings are coming to market, so buyers are better able to find the right home for them. The lack of listings in San Francisco has proven challenging to buyers, and prices have continued to fall. However, it’s notable that even though the median price of a single-family home is 22% lower than last May, when adjusting for mortgage rate increases, the monthly cost is only 10% lower.
Last year, single-family home prices peaked in the beginning of the year as buyers rushed to lock in a lower mortgage rate. The Fed announced rate hikes at the end of 2021 that would swiftly affect rates in 2022. The average 30-year mortgage rate rose 2% in the first four months of 2022, crossing 5% for the first time since 2011. That 2% jump caused the monthly cost of financing to increase 27%, so buyers rightly rushed to the market. As rates rose higher, the market cooled and home prices fell in large part to accommodate the higher cost of a mortgage. Both supply and demand were lower than normal in the second half of 2022.
In 2023, demand started to rise again despite elevated mortgage rates and was met by a high number of new listings. Price increases this year have been largely a function of more homes coming to market and inventory growth, which is counterintuitive to supply and demand. Supply was so low that more homes were able to better match buyers to a desirable property, giving sellers more pricing power. As demand increases through the summer months, competition among buyers will climb with it, raising home prices.
Inventory is rising, but sales are growing faster than new listings
Single-family home and condo inventory, sales, and new listings rose over the past four months, although all remain at depressed levels. The number of home sales is, in part, a function of the number of active listings and new listings coming to market. Even though all those metrics are far below typical levels, these trends are all signs of a healthier market. Currently, inventory is still quite low relative to demand, so far more new listings could come to the market. 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, sales jumped 125% while new listings rose 70%.
As buyer competition has ramped up and sellers are gaining negotiating power, sellers are receiving more of their listed price. In May 2023, the average seller received 3-5% more of their listed price as compared to January. Inventory will almost certainly remain historically low for the year and will likely only get more competitive in the summer months.
Months of Supply Inventory declined in May, moving further into 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). The Bay Area market tends to favor sellers 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 — at least for San Francisco. Overall, MSI has trended lower over the past four months, indicating the market more strongly favors sellers. The sharp drop in MSI occurred due to the higher proportion of sales relative to active listings and less time on the market.