Greater Bay Area Housing Market Report -January 2024

January 23, 2024

Greater Bay Area Housing Market Report -January 2024

The Big Story

Mortgage rates are plummeting, but how far will they fall?
 
Quick Take:
  • The average 30-year mortgage rate fell 1.18% in the last two months of 2023, which is a significant drop from the 23-year high reached at the end of October 2023 and cut the cost of financing by 11%.
  • Although sales are still down 7% year over year, they rose 1% month over month, ending a five-month streak of decline. Even though inventory rose for most of 2023, supply is still tight, which prevented home prices from falling meaningfully in the second half of the year.
  • The median home price declined approximately 7% in the second half of 2023, about half as much as the 13% decline in the second half of 2022. If the Fed begins to cut rates as soon as March, which financial markets are predicting, 30-year mortgage rates could easily fall another point, bringing buyers and sellers back to market in the spring and summer.

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

A 1.18% mortgage rate drop matters … a lot

The next Fed meeting isn’t until the end of January, but financial markets have already made major assumptions about what the Fed will do in 2024. In the December 2023 meeting, Fed members indicated there would likely be three 0.25% cuts to the fed funds rate by the end of 2024, but they noted a high degree of uncertainty. Markets took this news and made their own conclusions. As of January 3, 2024, fed funds futures traders (the people who make a lot of money being right about where rates will go) expect the Fed to cut the federal funds rate by a quarter point six times in 2024. Currently, the fed funds rate is between 5.25% and 5.50%.

In any case, for the >70% of homebuyers who finance their purchases with mortgages, rate cuts are very good news, as shown by the month-over-month increase in sales. However, even before the December meeting, economic indicators seemed favorable for rate cuts, which, in part, caused mortgage rates to drop 0.57% in November 2023 — a significant fall from the 23-year high of 7.79% in October. Markets move a lot faster than the Fed, and the 1.18% mortgage rate drop in November and December brings to mind the trends we saw in the first quarter of 2022. In December 2021, Fed Chair Jerome Powell stated that they were increasing rates beginning in March 2022, but mortgage rates increased by about a point in the first quarter even before the Fed made any changes.

The 1.18% decline in mortgage rates has set the stage for a much busier spring and summer season, although we still expect a relatively slow first quarter. Interest rates are still too high for potential buyers and sellers to rush back to the market, especially when they expect further rate cuts. However, if mortgage rates were to drop another point to around 5.5%, a huge number of participants would jump back into the market. Remember that every 1% decrease in interest rates roughly equates to a 10% decrease in monthly financing costs. The inverse is also true, which is why rates have priced buyers out of the market and remain the primary cause of the market slowdown over the past two years.  

Because inventory hasn’t grown, prices haven’t meaningfully declined. In fact, home prices currently fall only 8% below the June 2022 all-time high, which means that any savings will likely come from rate drops. Even if a significant number of sellers come to market, there’s enough pent-up demand that inventory won’t be able to grow enough for prices to stagnate or decline outside of normal seasonal trends. On top of that, home prices almost always appreciate. In other words, betting on home prices to decline is statistically similar to betting on 00 in roulette. Nationally, the median price will likely hit a new all-time high in June 2024. The National Association of Realtors’ Chief Economist Lawrence Yun recently remarked that home prices keep marching higher, and only a dramatic rise in supply will dampen price appreciation.

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:
  • Year over year, the median single-family home prices rose across most Bay Area counties in December, while condo prices were more mixed. We expect more buyers and sellers to come to the market in the spring as mortgage rates decline further.
  • Active listings in the Greater Bay Area fell 27% month over month, as sales nearly doubled new listings, which fell to record lows. As mortgage rates drop, we will likely see more new listings in the first quarter, which should help alleviate some excess demand.
  • Months of Supply Inventory declined significantly in December, as sales outpaced new listings, indicating the market firmly favors sellers as we enter the new year.

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

Median single-family home prices close 2023 up year over year across most of the Bay Area

In the Greater Bay Area, home prices haven’t been largely affected by rising mortgage rates after the initial period of price correction from April 2022 to January 2023. In December, the median prices across most Bay Area counties were only slightly below their record highs with the exception of Marin and San Francisco, which peaked incredibly high in 2022. We expect prices to remain fairly stable in the winter months, but as interest rates decline and more sellers come to the market, prices will almost certainly rise in the first half of 2024. However, more homes must come to the market in the spring and summer to get anything close to a healthy market.

High mortgage rates soften both supply and demand, so ideally, as rates fall, far more sellers will come to the market. Rising demand can only do so much for the market if there isn’t supply to meet it. Unlike 2023 inventory, 2024 inventory has a much better chance of following more typical seasonal patterns.

Inventory, sales, and new listings declined month over month

Single-family home and condo inventory barely increased at all last year, which is far from the seasonal norm. In 2023, inventory didn’t have anything resembling the typical sine wave, since far fewer sellers came to the market, especially in the first half of the year, and the low inventory and fewer new listings slowed the market considerably. New listings have been exceptionally low, so the little inventory growth last year was driven by softening demand. In fact, new listings were the lowest on record in the Bay Area, and the lack of new listings was the main reason San Francisco inventory declined to a record low in December. Typically, inventory peaks in July or August and declines through December or January. In December, inventory, sales, and new listings dropped across Bay Area markets. With the current low inventory levels, the number of new listings coming to market is a significant predictor of sales. Month over month, new listings fell 50% and sales declined 10%. Year over year, sales and new listings are down 9% and 14%, respectively. Total inventory is down 17% 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 95% of list price in January, which grew to 102% by mid-year. From June to December, the average seller received around 99% of list price.

Inventory will almost certainly remain historically low for the next few months, and buyer competition will ramp up meaningfully in the spring, which will drive price appreciation.

Months of Supply Inventory in December 2023 indicated 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 markets tend to favor sellers, which is reflected in their low MSIs. San Francisco MSI is notable for its variability over the past year, oscillating from buyers’ to sellers’ markets twice over the course of 10 months. Currently, single-family home MSI is below three months of supply (sellers’ market) in every Bay Area county except for single-family homes in Napa, which is more balanced, and condos in Monterey, which now favors buyers. The condo markets are a little more mixed, but mostly balanced.

Local Lowdown Data

Our team is committed to continuing to serve all your real estate needs while incorporating safety protocol to protect all of our loved ones.

In addition, as your local real estate experts, we feel it’s our duty to give you, our valued client, all the information you need to better understand our local real estate market. Whether you’re buying or selling, we want to make sure you have the best, most pertinent information, so we’ve put together this monthly analysis breaking down specifics about the market.

As we all navigate this together, please don’t hesitate to reach out to us with any questions or concerns. We’re here to support you.

 

 

 

 

 


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