The Big Story

Quick Take:

Home prices fell for the first time this year, declining 1.05% month over month, aligning with seasonal norms where prices rise in the first half of the year and contract in the second half of the year.
In August, the average 30-year-mortgage rate reached the highest level since June 2021 at 7.23%, largely contributing to the lack of new inventory and low number of sales. The number of home sales continued to slow for the fifth month in a row.
Although the housing market still favors sellers, it’s trending more meaningfully toward balance, as demand slows and inventory starts to rebuild.

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

Home prices decline for the first month this year

The average 30-year-mortgage rate hit a 22-year high in August. Higher mortgage rates, which negatively affect affordability, combined with the annual summer sales slowdown and higher inventory have caused prices to decline month over month from the 2023 price peak in June. The National Association of Realtors (NAR) data show that the median home sale price in the United States declined by 1%, and Realtor.com data indicate that the median list price per square foot also decreased 1%. These aren’t major declines, as you can see, especially when considering the decline in sales. According to NAR, the number of homes sold dropped 2.2% month over month and 16.6% year over year, which is substantial but not necessarily unexpected. Home sales in 2020 and 2021 were the highest since the 2006 housing bubble burst, and normal seasonal trends were less pronounced or non-existent. It’s very easy to get wrapped up in the recent past, especially when it comes to large financial purchases, most of which are life-changing. We weren’t sure how long the break in historic seasonality would last, but it seems to have ended, and seasonality has mostly returned.

With historic seasonal trends, home prices and inventory increased in the first half of the year and declined in the back half. The pattern is essentially two steps forward and one step back over and over, so even when the second half of the year sees some price decline, year-over-year prices tend to be higher. In June 2023, the median price landed 0.9% below the all-time high reached in June 2022, revealing that prices can bounce back quickly and, maybe more impressively, can appreciate during a period of high mortgage rates.

This year, inventory may peak later than usual if sales continue to decline through what are often the strongest sales months (May-August). Inventory has steadily increased since March but is still historically low. Similar to sales, inventory is down 14.6% year over year. However, year to date, inventory has increased 15.6%, whereas sales has only increased 1.0%. Inventory growth tends to slow in the second half of the year, which is what we expect during the remainder of 2023. Far fewer new listings have come to market than a typical year, so inventory growth has been driven by fewer sales. Since sales commonly decline in the back half of the year, especially once we hit the holiday season, 2023 may have the fewest homes sold in modern history. The drop in sales and increase in inventory has caused the market to trend toward balance, although we are still in a sellers’ market. The white-hot market from 2020 to 2022 created the market we see today, which is neither hot nor cold, but rather stuck in a space of low supply and softening demand. We might simply say the market is slow.

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, the median prices have trended lower for the past 16 months. However, this downward trend is offset by higher rates, making homes the same or more expensive even after a significant price drop.
Demand is softening in San Francisco, which is typical this time of year. Considering inventory is historically low, less demand is actually beneficial to the market.
Months of Supply Inventory has risen over the past couple months for single-family homes due to fewer sales, and buyers are gaining more negotiating power. Single-family homes are in a more balanced market, while the condo market favors buyers.

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

Lower prices, same cost

In San Francisco, the housing market is always experiencing high demand. But potential homebuyers are stymied by the lack of inventory. High mortgage rates have kept sellers from coming to the market and have also contributed significantly to the large price decline from the March 2022 peak. Most homebuyers finance their home in some capacity so for illustrative purposes we compared the record $2.2 million median home in March 2022 financed and August’s $1.6 million median home price financed at the average mortgage rates in the month of purchase and found that they cost the exact same in terms of monthly mortgage cost. Even though homes. Even though prices have dropped 27% from the peak, the cost is the same! Additionally, homeowners who are happy with their home aren’t selling in the current market. All this skews price data lower. San Francisco has supply issues in the best of times, but current inventory levels have almost created a market standstill.

Typically, demand begins to noticeably decline this time of year, so the low supply may become less of an issue. However, less of an issue doesn’t mean a non-issue. Quality new listings will certainly be sold quickly, while less desirable homes will sit on the market. This isn’t unusual, but it’s more apparent due to current mortgage rates. 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 the new normal

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. Considering how many people bought or refinanced from 2020 to 2022, this shouldn’t be surprising. Current homeowners don’t want to give up their low mortgage rate so sellers simply aren’t coming to the market. Currently, inventory is so low that any amount of new listings is good for the market. However, new listings declined rapidly in June, July, and August, 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. Since inventory and sales peaked in May 2023, sales declined 23%, while new listings fell 33%.

As demand slows, buyers are gaining more negotiating power and paying slightly less than asking price on average. In June 2023, the average seller received 102% of list price compared to 99% of list in August. That being said, inventory will almost certainly remain historically low for the rest of the year and likely remain low in 2024, which will create price support.

Months of Supply Inventory trending toward balance

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 two months, MSI has risen, now indicating a more balanced market. Condo MSI moved from a balanced market at the end of the first quarter 2023 back to a buyers’ market. These transitions occurred largely due to the substantial drop in sales since the start of summer.