The Local Lowdown: May 2023

Michelle Kim | May 1, 2023

The Local Lowdown

Quick Take:

Active listings in San Francisco declined in March, as sales increased and fewer listings came to market.
Home prices rose meaningfully in the first quarter of 2023, up 10.8% for single-family homes and 19.9% for condos, indicating that unusually low inventory is once again driving pricing despite higher mortgage rates.
The market is firmly back to a sellers’ market for single-family homes and slightly favors sellers for condos after Months of Supply Inventory declined sharply, as sales increased and homes sold faster month over month.

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

Declining Inventory Meets Rising Demand

Every year, by at least March, we hope to see inventory rise after a high number of new listings come to market, which easily accommodate the increase in sales we also tend to see in the first half of the year. However, the number of new listings declined each month of the first quarter of 2023, while sales rose. Typically, inventory grows in the first half of the year, peaking in June or July. We don’t expect the inventory growth in the second quarter to make up for the decline in the first quarter, keeping supply of homes and, in turn, sales historically low for the rest of the year. Even with sales trending higher, they are still far below last year’s level. As demand increases in the second quarter, competition among buyers and housing prices will climb with it. If active listings drop further in the second quarter, we could easily see home prices move significantly higher into the summer.

Sales Jumped 67% From February To March, As Inventory Nears Record Lows

Total inventory has remained fairly stable near all-time lows over the past four months, after a steep decline from May to December 2022. Higher interest rates and the buying boom from 2020 and 2021 created the current market conditions of low inventory, new listings, and sales. Homeowners generally aren’t buying and selling properties year after year; the median homeowner tenure is about 13 years, according to Redfin. It’s reasonable, therefore, to assume that if an outsized number of sales happen in a two year period, far fewer sellers will come to market in the year or two after that event. For homeowners that either bought or refinanced in 2020 or 2021 with historically low rates, the prospect of moving and financing at a much higher rate isn’t appealing.

Interest rates have been elevated for enough time that buyers are more comfortable re-entering desirable markets like San Francisco’s. Sales jumped 66.7% from February to March, while inventory further declined, down 43.0% year over year. Buyers aren’t facing anything similar to the hypercompetitive 2021 market, but competition is certainly ramping up. New listings fell by 61.8% year over year, while sales declined 41.6%. We still expect some inventory growth in the second quarter of 2023, but inventory will almost certainly remain historically low for the year.

Higher Sales Drop Months Of Supply Inventory, Indicating A Market Shift

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 dropped in February and March for both single-family homes and condos, meaning the market shifted from a buyers’ market to a sellers’ market. The sharp drop in MSI occurred due to the jump in sales and continued low inventory.