National Shifts in the Market

Rising mortgage rates. Rising housing inventory. Rising inflation. These topics are making headlines. This market update will focus on what’s happening nationally, within California and the greater Bay Area, as well as the micro-level in specific South Bay neighborhoods.

Slowdown Across The U.S.

May is usually one of the busiest months for real estate. Yet May 2022 saw a 3% decline in U.S. home sales compared to April, according to a Redfin report. The report also showed that median home sales prices were up 14.8% over May 2021. Yet with rising mortgage rates, home demand is declining. May’s active listings were down 0.7% compared to April, and were 4.3% lower than May 2021. In general, fewer buyers faced competing offers, a trend that has declined for four consecutive months.

It’s mid-year, so many financial news sources are making market predictions.

• Forbes Advisor
  Forbes doesn’t see home prices plummeting. Existing-home sales dropped 5.4% from May to June, according to the National Association of Realtors. The median sales price of these homes reached a record high, up 13.4% from a year ago. All of this indicates home prices are not dropping anytime soon.
  
  
• Bankrate
  Bankrate’s chief financial analyst, Greg McBride, anticipates demand dropping sharply over the next few months due to high home prices and higher mortgage rates. “Even homebuilding activity is slowing due to supply constraints and cooling demand. But while the market is cooling, prices are not necessarily dropping. We will still see home price levels that are 15 to 20 percent above what a home would’ve sold for six to 12 months ago.”
  
  There’s a consensus amongst analysts that we’re not headed to a housing bubble. Typically, a housing bubble occurs when there is high demand, surplus of supply, and homes are easily obtainable via loose credit (like we experienced in 2008). Nor has the market seen a dramatic increase in home construction or speculative home purchasing with subprime mortgage products.
  
  
• MarketWatch
  MarketWatch made four predictions in April that we’re seeing already playing out in the market. First, they predicted less competition for higher priced homes. With rising interest rates, buyers have had to adjust their expectations of what they can afford. There will be higher competition for lower-priced homes and less competition for higher-priced ones.
  
  Second, rising mortgage rates are pushing some buyers out of the market. With home affordability dropping and rising rates, some buyers simply can not afford the mortgage payments.
  Third, home prices will continue to rise but growth will slow. This prediction is based on data from CoreLogic, Fannie Mae, Zillow and others. Nicole Bachaud, Zillow economist, commented “we’ll see price growth slow later this year due to pullback in demand as enough buyers hit an affordability ceiling between rising prices and mortgage rates.” Even so, Redfin’s Chief Economist, Daryl Fairweather, said “don’t expect this to become a buyer’s market anytime soon.” The sharp increase in mortgage rates is pushing more homebuyers out of the market, but it also appears to be discouraging some homeowners from selling. With demand and supply both slipping, the market isn’t likely to flip from a seller’s market to a buyer’s market anytime soon.”
  
  Lastly, buyers who moved to more affordable areas and worked from home in 2020 and 2021 are facing difficult decisions about returning to work. Employers are shifting back to an office environment which is clashing against demands for flexibility. And, pay hasn’t kept pace with inflation, especially with the high cost of gas, food, and even daycare. It could mean that some employees will have to move back to more urban areas.

Interest Rates, Yield Curves & Unemployment

Interest Rates

In June the Fed raised the federal funds rate target by .75%, the biggest hike since 1994. The Fed raised the Fed Funds rate again by .75% again in their July 26-27 meeting, another effort toward “restrictive policy” to slow down growth and curb inflation. While the Fed rate does not directly impact mortgage rates, it does affect the bond market where many mortgage rate indices are tied.

For real estate, rising mortgage rates have numerous effects. First, they erode home buying power. Homebuyers adjust down what they can afford. Depending on their budget, some will be simply pushed out of the market or decide whether or not to stay in the game… which in turn dampens demand. Second, homeowners looking to sell and reinvest (upsize, downsize, move neighborhoods) must rethink what they are willing to pay. For those homeowners who refinanced, taking advantage of rates ~ 3%, it's tempting to stay put… which in turn dampens inventory.

Yield Curves

Also on my watch list is the yield curve inversion – when shorter-term government bonds have higher yields than longer-term ones. Economists often view an inverted yield curve as a harbinger of a recession. According to Reuters, two-year Treasuries yielded more than 10-year paper. Short-term yields, more sensitive to interest rates, are rising with rate-hike expectations while higher long-term rates reflect concerns that the Fed will be unable to control inflation. The 2/10 yield curve inversion occurred in late March, the first time since 2019.

I’ve often said that the Bay Area real estate market is influenced by the stock market, the NASDAQ in particular. In an economy fueled by tech giants, start-ups and VC investing, you can easily see the correlation. Homebuyers, especially first-timers, often use stock-options and other investments to fund down payments. Market volatility and poor performance can erode these funding sources. Buyers may also feel less confident in their financial situation.

Unemployment

The national unemployment rate, as of June, has remained steady at 3.6%. California’s unemployment rate, as of May 2022, is higher at 4.3% Comparatively, the unemployment rates for Bay Area metros are nearly half:

• San Jose-Sunnyvale-Santa Clara –  1.9%
• Oakland-Hayward-Berkeley – 2.6%
• San Francisco-Redwood City-South-San Francisco – 1.8%

More recently in the local news are hiring freezes, and in some cases layoffs, in Silicon Valley’s most notable employers. Tesla laid off 10% of its staff in June and paused hiring. Netflix, headquartered in Los Gatos, laid off 450 employees in the last two months. Cryptocurrency exchange platform, Coinbase, reduced their SF team by 18% after admitting their company grew too quickly. Meta (parent company to Facebook and Instagram), Twitter, and Intel have all enacted hiring freezes. As economic growth slows, we’ll need to wait and see what the human resource impact on start-ups and small- and medium-sized businesses will be.

The Golden State

The California Association of Realtors (CAR) tracks home sales activity by region and county. Single-family homes rose 1.6% from April to May 2022, and 9.9% when comparing May 2022 to May 2021.

What I'm Seeing Now

The current market is hard to summarize as there are so many (and shifting) variables. What I can tell you is that it appears both sellers and buyers are in a kind of holding pattern. Here’s what I’m seeing:

1. It seems like half of the U.S. is on vacation. There’s a pent up desire to travel due to the pandemic, with many of us visiting Europe where the dollar is strong. For those not venturing outside the U.S., others are on the move with visits to national parks, resort and amusement parks, and other popular destinations. I anticipate this “vacation wave” to last up until school resumes.
2. We’re shifting away from an extreme focus on real estate. In 2020 and 2021 many employees worked from home. Desire for more elbow room – especially for those with school-aged children – spurred many to take the plunge into homeownership. As pandemic protocols have eased, families are focusing on other things. This is especially true surrounding the Memorial Day and Independence Day holidays, impacting the number of closed transactions.
3. For those who currently own, there’s a reluctance to trade up and pay more for housing. Years ago, the average time in a home before selling was between 7-10 years. Now that average is 13 years. For the Bay Area, that’s stretched to 14 years. This phenomenon translates into less available inventory.
4. With mortgage rates rising, buyers are dismayed that their buying power has diminished. Now there is a sense of urgency to close on a deal. Remember the Fed’s rate increases do not have an immediate effect on mortgage rates. It’s also important to have perspective about mortgage rates. In 2008, the 30-year fixed mortgage averaged 6.03% which was considered good. For the last ten years rates have been abnormally below historic levels. Recent market adjustments are still considered low when you look at the long-range charts.
5. Rents are increasing. According to Zumper, the median rent for a 1-bedroom apartment in San Jose is currently $2,713, a 24% increase compared to the previous year. These increases further fuel prospective buyers to adjust their home-buying budgets and expectations.
6. I am seeing that less-than-perfect houses, that are not aggressively priced, sit on the market. These properties can present an opportunity for buyers. If you or someone you know is looking to buy, talk to me. This is the time when you need an experienced and savvy Realtor negotiating for you.
7. When looking at listing a home, the pricing data isn’t a lot of help right now. Sales comparables are two months old, and the market has shifted since then. If you look at active activity, there aren’t many properties for comparison. I do look at pending sales, but those are few in number. So, if you’re looking to sell, this is where my years of expertise in both hot and cold markets come into play. Having the right marketing plan makes a world of difference.

Do I think housing prices will fall? Not dramatically, if much at all. There’s not an onslaught of new inventory. Demand remains solidly high despite rising interest rates. Buyers are also motivated to buy due rental increases and an overall desire to secure their housing. As a result, I anticipate that the market for properties $4 million and below will remain relatively stable.

I’m excited to see what the fall season brings us! Now let's look at the numbers by county.

Santa Clara County

Here’s a comparison of June and May statistics so you can see month-over-month (MoM) as well as year-over-year (YoY) data. Note: the June report now includes both median and average sales prices.

Single Family Residences

• Monthly sales transactions. The number of closed sales have dropped MoM and YoY. June had 916 closed sales compared to June 2021’s 1337 despite rising inventory.
• Days On Market (DOM). It took more days on the market (DOM) to transition from an open listing to a ratified contract. YoY, DOM rose from 12 to 14 days. MoM DOM rose from 11 to 14 days.
• Single-family residence inventory. The active inventory trend lines show an increase YoY and MoM.

Townhomes & Condos

• Monthly sales transactions. The number of closed sales have dropped MoM and YoY. June had 387 closed sales compared to June 2021’s 635 and May 2022’s 482 transactions despite rising inventory.
• Days On Market (DOM). Compared to last June (YoY), it took fewer days on the market (DOM) to transition from an open listing to a ratified contract, from 19 to 13 days. MoM DOM rose from 11 to 13 days.
• Townhome and condo inventory. The active inventory trend lines show an increase MoM but still below 2021 levels.

San Mateo County

Here’s a comparison of June and May statistics so you can see month-over-month (MoM) as well as year-over-year (YoY) data. Note: the June report now includes both median and average sales prices.

Single Family Residences

• Monthly sales transactions. The number of closed sales have dropped MoM and YoY. June had 374 closed sales compared to June 2021’s 569 and May 2022’s 466 transactions despite rising inventory.
• Days On Market (DOM). It took the same number of days on the market (DOM) to transition from an open listing to a ratified contract YoY. MoM, DOM dropped from 19 to 14 days.
• Single family residences. The active inventory trend lines show an increase MoM and nearing YoY levels.

Townhomes & Condos

• Monthly sales transactions. The number of closed sales have dropped MoM and YoY. June had only 127 closed sales compared to June 2021’s 191 and May 2022’s 153 despite rising inventory.
• Days On Market (DOM). It took fewer days YoY on the market (DOM) to transition from an open listing to a ratified contract. DOM dropped from 20 to 18 days. MoM DOM remained steady at 18 days.
• Townhome and condo inventory. The active inventory trend lines show an increase MoM but still below 2021 levels.

Santa Cruz County

Here’s a comparison of June and May statistics so you can see month-over-month (MoM) as well as year-over-year (YoY) data. Note: the June report now includes both median and average sales prices.

Single Family Residences

• Monthly sales transactions. The number of closed sales have dropped MoM and YoY. June had 143 closed sales compared to June 2021’s 221 and May 2022’s 156 despite rising inventory.
• Days On Market (DOM). It took more days on the market (DOM) to transition from an open listing to a ratified contract. YoY, DOM rose from 13 to 19 days. MoM DOM rose from 13 to 18 days.
• Single-family residence inventory. The active inventory trend lines show an increase YoY and MoM.

Townhomes & Condos

• Monthly sales transactions. The number of closed sales have dropped YoY. June had 35 closed sales compared to June 2021’s 44, yet we saw an increase from May’s 28 transactions.
• Days On Market (DOM). It took more days on the market (DOM) to transition from an open listing to a ratified contract. YoY, DOM dropped from 44 to 35 days. MoM DOM rose from 7 to 12 days.
• Townhome and condo inventory. The active inventory trend lines show an increase MoM but still below 2021 levels.

Reach Out & Connect

I’m meeting with clients via phone, video conferencing, and by appointment. Whether you’re looking to buy or sell, you need an experienced guide in this complex and fast-paced real estate market. I’ve helped hundreds of individuals like you successfully negotiate the most important financial transaction you’ll ever make.