The Local Lowdown: June 2023

The Local Lowdown

Quick Take:

Active listings in Silicon Valley continued to rise in April for single-family homes, showing signs that inventory will follow normal seasonal trends, albeit at depressed levels.
Home prices were up year to date through April 2023 in Silicon Valley with the exception of San Mateo condos. Notably, median single-family home prices rose considerably over the past four months, up 16% in San Mateo and Santa Cruz and 22% in Santa Clara, highlighting that a healthier market can boost prices significantly despite higher mortgage rates.
Months of Supply Inventory has declined significantly in 2023, and sellers are receiving a greater percentage of asking price, both of which highlight an increasingly competitive environment for buyers.

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

Home prices boosted by a healthier market

Unlike many other California markets, Silicon Valley is notable this year due to its rapid single-family home price appreciation after a sharp decline from last year's March and April peaks. 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. Year to date, single-family home prices have increased 16% in San Mateo and Santa Cruz and 22% in Santa Clara.

Inventory grew as new listings came to the market

Single-family home and condo inventory rose slightly in April, although sales declined from March to April. However, in this instance, a decline in sales doesn’t indicate softening demand. The number of home sales is, in part, a function of the number of active listings. New listings fell 36% compared to last year, so it’s not surprising that sales declined as well. Even with higher interest rates, which only reduces the number of potential homebuyers, seasonal demand far outpaced available inventory. Over the past three months, sales jumped 74% while new listings increased 71%, both of which indicate a healthier market.

Buyer competition is ramping up with fewer listings coming to the market, and sellers are gaining negotiating power. In January 2023, the average seller received 94% of list price compared to 101% of list in April. 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 remains low, indicating a firm 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 Silicon Valley market tends to favor sellers, and the drop in MSI this year for both single-family homes and condos further emphasizes sellers’ increasing negotiating power.