SAN FRANCISCO REAL ESTATE MARKET UPDATE - March 2024

The Big Story

Mortgage rates were remarkably stable in January, and near-term Fed rate cuts look less likely

Quick Take:

After the average 30-year mortgage rate fell over 1% in November and December 2023, rates stabilized between 6.60% and 6.70% in January 2024. Median prices continued to decline in January, but we expect prices to rise in February — the seasonal norm.
Sales fell 6% year over year and 1% month over month, hitting the lowest levels in modern history. Inventory fell nearly 12% month over month, making supply incredibly tight regardless of slower sales.
Consumer confidence has only recently begun climbing despite nearly every economic indicator showing a strong U.S. economy for some time. This, of course, largely can be explained by inflation and the recent improvement in real earnings (that is, inflation-adjusted earnings).

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

Will consumer confidence bring back the housing market?

The Fed met January 30th through 31st and decided to keep its benchmark rate at a range of 5.25% to 5.50%, which it’s held since July 2023. The Fed board members left the meeting with a hopeful tone, but the meeting results are somewhat disappointing to those pushing for rate cuts in March. The door for cuts is cracked open, but we now expect rate cuts to begin closer to summer rather than in spring. Fed chairman Powell’s rationale is reasonable: the current rate levels seem to be working, and if it’s not broken, don’t fix it. The Fed’s dual mandate is for stable prices (inflation ~2%) and low unemployment. Currently, inflation is dropping, and unemployment is low, at 3.7%. Recession fears have declined once again, and the soft landing — slowing the economy without recession — that the Fed intended seems to be unfolding. Powell was quick to say the Fed does not have a growth mandate, which is correct, so the risks of cutting rates early will likely outweigh the benefits of cutting in March. However, if inflation continues to fall, and economic indicators are still favorable, rate cuts will likely start mid-year.

After the sharp mortgage rate drop in November and December 2023, the housing market saw real potential to warm considerably in Q1 2024, but now we expect a slower route to a healthier market. Mortgage rates remained steady at around 6.5% in January 2024, which is still about 1% higher than needed to get more participants to enter the housing market. We know the large mortgage rate drop from the 23-year high of 7.79% in October to around 6.5% wasn’t large enough to bring buyers and sellers back to the market, because the data now show that they didn’t come back. Sales reached a historic low, the number of new listings coming to market are near all-time lows, and inventory declined. This is due, in part, to normal seasonal trends — winter is when all those metrics tend to reach a seasonal bottom — but seasonality doesn’t fully explain those drops in the context of a substantial decline in rates. From October 2023 to January 2024, the monthly cost of financing a median priced home decreased nearly 13%, and the market still slowed on both the buyer and seller sides of the market, implying that rates are still too high for most would-be participants. However, we believe that if rates fall another percentage point, which roughly equates to another 10% decrease in monthly financing costs, the market will react positively and price more people into the housing market.

Another important aspect of the current market is the very recent positive changes in workers’ real earnings. The psychological effects of nearly 10 years of earnings growth, culminating in a final jump in the first two quarters of 2020, before dropping rapidly once COVID hit and inflation rose, was perhaps the most significant cause of the low economic sentiment in 2022 and most of 2023. People quickly become attached to the amount of money they make and the spending power of that money, so the feeling that it was taken away creates dissatisfaction. It’s also fair to say that part of the American dream is progressively increasing earnings as we age. But earnings didn’t keep up with inflation, so real earnings dropped, causing even more dissatisfaction. From 2021 to 2023, the purchasing power of the U.S. dollar declined 15%; therefore, earnings needed to increase 15% just to feel as financially well off as three years prior. For many, if not most people, earnings weren’t keeping up with inflation, and people don’t tend to buy homes when they feel less wealthy. However, after six straight quarters of real earnings growth, it makes sense that people broadly feel better about their finances, which will only benefit the housing market.

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:

The median single-family home and condo prices rose meaningfully from December 2023 to January 2024, up 12.9% and 7.3%, respectively. Year-over-year prices also appreciated significantly, up 18.2% for single-family homes and 7.5% for condos.
Active listings in San Francisco fell 14% month over month. Both single-family home and condo inventory hit record lows, as more new listings were met by more sales and more homes coming under contract.
Months of Supply Inventory rose from December 2023 to January 2024, but still indicates the market favors sellers for single-family homes and buyers for condos.

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

Median prices rise in January 2024 for single-family homes and condos

In San Francisco, home prices haven’t been largely affected by rising mortgage rates after the initial period of price correction from May 2022 to July 2022. Since July 2022, the median single-family home and condo prices have hovered around $1.5 million and $1.2 million, respectively. Month over month, in January 2024, the median single-family home price rose 13%, while condo prices increased 7%; but, year over year, the median prices were up 18% for single-family homes and 8% for condos. 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. Additionally, the sustained downward inventory and low number of new listings will only raise prices as demand grows. More homes, however, 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.

Single-family home and condo inventory hit all-time lows for the second month in a row

Since the start of 2023, single-family home inventory has followed fairly typical seasonal trends, but at a significantly depressed level, while condo inventory has been in decline since May 2022. 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. Last year, sales peaked in May, while new listings and inventory peaked in September. New listings have been exceptionally low, so the little inventory growth throughout the year was driven by fewer sales. In November and December, new listings dropped significantly without a proportional drop in sales, causing inventory to fall to an all-time low, which further highlights how unusual inventory patterns have been over the past year. New listings rose nearly 119% month over month after hitting a record low number of new listings coming to market in December. New listings still couldn’t keep up with sales in January, however, and inventory declined further. Month over month, homes coming under contract increased 37%. Year over year, inventory and new listings are down 27% and 29%, respectively. However, sales are up 1% year over year.

Months of Supply Inventory in December 2023 indicated a sellers’ market for single-family homes and a buyers’ market for condos

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 has been volatile, moving between a buyers’ and sellers’ market throughout the year. In January, MSI increased, indicating that condos now favor buyers. However, MSI for single-family homes still indicates the market favors sellers.

We can also use percent of list price received as another indicator for supply and demand. Typically, in a calendar year, sellers receive the lowest percentage of list price during the winter months, when demand is lowest. January tends to have the lowest average sale price (SP) to list price (LP), and the summer months tend to have the highest SP/LP. The January 2024 SP/LP was 1% lower than last year, meaning we expect sellers overall to receive a lower percentage of the list price in 2024 than they did in 2023.