SAN FRANCISCO REAL ESTATE MARKET UPDATE - November 2023

November 1, 2023

HELM Newsletter

SAN FRANCISCO REAL ESTATE MARKET UPDATE - November 2023

The Big Story

+7% Mortgage Rate Era

Quick Take:

The national median home price is only 1.6% below the all-time high reached in June 2022, which shows how consistent prices are despite the current interest rates. Home affordability has dropped to its lowest level since the early 1980s when mortgage rates rose above 18%.
In September, the average 30-year mortgage rate reached its highest level since December 2020 at 7.31%. Higher interest rates have decreased affordability, pricing many buyers out of the market, and dampened homebuilding, as construction loans have become too costly for builders.
Home sales have fallen below the initial pandemic dip of May 2020, which further highlights the market slowdown and suggests that the market will remain depressed for at least another six months to a year.

Note: You can find the charts & graphs for the Big Story at the end of the following section.

The great affordability drop

The average 30-year mortgage rate hit a 23-year high in September, closing the month at 7.31%. The current high mortgage rates are negatively affecting affordability, making it incredibly hard not to compare mortgage rates and prices to those of the past few years — because the comparison is so stark. In 2020 and 2021, 30-year mortgage rates were the lowest in history at an average of 3.11% and 2.96%, respectively. Low rates priced buyers into the market, which drastically grew demand in a market with fairly static short-term supply. Competition among buyers rose sharply, increasing prices at the fastest rate ever. The Case-Shiller 20-City Composite Home Price Index rose 41% from June 2020 to June 2022. Meanwhile, inventory plummeted, creating an even larger supply issue than the already undersupplied U.S. market. Although home prices contracted in the second half of 2022, as the Fed began hiking rates, they bounced back in the first half of 2023 and are now only 1.6% below the all-time high. Once we couple the median price with the average 30-year mortgage rate, we can see the actual monthly cost rather than just the price. Only 27% of homes were purchased with cash in August, a good portion of which were likely bought by homeowners selling their home and using the proceeds to buy another. Most buyers, however, are financing the purchase of their homes in some capacity and are, therefore, affected by the high mortgage rates. To put the change into perspective, the median home financed in August 2023 cost 15% more on a monthly basis than the median home financed in June 2022 — the all-time high price — because rates are 1.8% higher.

As you’ve likely already noticed, our current market involves an interesting dynamic of low supply and demand, but high prices and cost of financing. A lot of this has to do with (potential) seller mentality. Approximately 75% of U.S. homeowners have mortgage rates of less than 4%, according to JPMorgan, which has kept potential sellers from entering the market because they either stay in their home or keep their home as a rental property when they move. As a result, new listings remain significantly depressed. When we compare the first three quarters of 2022 and 2023 with the average from the first three quarters of 2017 to 2021, new listings are below average by about 1.5 million homes. The National Association of Realtors reported that the number of homes sold dropped 0.74% month over month and 15.3% year over year, which is less surprising considering that there are far fewer homes from which to choose. That being said, people move for all sorts of reasons, and supply has declined further than demand, which has helped prices stay high. Homebuilders are also affected by higher rates when it comes to construction loans, so homebuilder sentiment is in decline, according to the National Association of Home Builders/Wells Fargo Housing Market Index. We will likely see fewer and fewer new homes built until rates come down, negatively affecting supply.

Different regions and individual houses vary from the broad national trends, so we’ve included a Local Lowdown below to provide you with in-depth coverage for your area. In general, higher-priced regions (the West and Northeast) have been hit harder by mortgage rate hikes than less expensive markets (the South and Midwest) because of the absolute dollar cost of the rate hikes and limited ability to build new homes. As always, we will continue to monitor the housing and economic markets to best guide you in buying or selling your home.

Big Story Data

The Local Lowdown

Quick Take:

Overall, median prices have trended horizontally over the past 12 months. Considering the rapidly rising interest rates, homes have maintained their value well.
Active listings rose from August to September, which is typical for the San Francisco market. Year over year, inventory is down 22%, highlighting one of the challenges of buying a home in a desirable market.
Months of Supply Inventory rose significantly in the third quarter, shifting the single-family home market from a sellers’ to a buyers’ market. The condo market has favored buyers since April.

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

Single-family home prices hit all-time high

In San Francisco, the price of housing is sticky — even during a period of rapidly rising mortgage rates. When mortgage rates shot up in 2022, prices contracted in the second half of the year. Since then, prices haven’t experienced huge variances. Year to date, prices of both single-family homes and condos have increased, up 3% and 14%, respectively.

The persistently low inventory and low number of new listings will create price support in the slower fall and winter seasons. Typically, demand begins to decline in the fall and bottoms out in January, so the consistently low supply should be less of an issue. With mortgage rates at a 23-year high, quality listings are going to have the most competition. This isn’t unusual, but potential homebuyers aren’t nearly as willing to pay a premium for a fixer upper as they were in 2020 and 2021.

Low inventory is here to stay

Since the start of 2023, single-family home inventory has followed fairly typical seasonal trends, but at a significantly depressed level. Low inventory and fewer new listings have slowed the market considerably. Typically, inventory peaks in July or August and declines through December or January, but the lack of new listings prevented meaningful inventory growth. Even though demand is softening due to higher interest rates and normal seasonality, inventory is so low that any amount of new listings is good for the market. Comparing new listings from January through September 2023 to the same time period in 2022, new listings are down 24%, which has directly impacted both inventory and sales. The number of home sales is, in part, a function of the number of active listings and new listings coming to market. Sales are down 26% year over year.

As demand slows, buyers are gaining slightly more negotiating power and paying less than asking price on average. The average seller received 96% of list in January, which grew to 102% by June. The amount sellers are receiving is starting to decline, and by September 2023, the average seller received 99% of list. That being said, inventory will almost certainly remain constrained for the rest of the year, and likely remain low in 2024, which will create price support and at least minor competition among buyers.

Months of Supply Inventory indicates the market now favors buyers for single-family homes

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 San Francisco market tends to favor sellers, at least 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. MSI indicated that single-family homes and condos began the year in a buyers’ market. MSI declined in the first half of the year for single-family homes, indicating that the climate shifted from a buyers’ market to a sellers’ market. However, over the past three months, MSI has risen substantially, now indicating a buyers’ market once again. Condo MSI moved from a balanced market at the end of the first quarter of 2023 back to a buyers’ market. These transitions occurred largely due to the substantial drop in sales since the start of summer.