Clear Indications of Cooling Market Dynamics

Sales are declining, and the numbers of active listings and price reductions are increasing. But the homes that are selling are still, on average, selling quickly for well over asking: Median sales prices and year-over-year appreciation rates remain high. When an overheated market cools, the change is typically gradual (absent a disaster event), and does not mean the market is weak by any normal standard. As an analogy, if traffic is going 100 miles per hour and drops to 65, it feels a lot slower, but cannot reasonably be described as slow. People will continue to have excellent personal and financial reasons to buy and sell homes.

As of late spring, across the Bay Area, less expensive home sales have been considerably impacted by rising interest rates – and this certainly occurred in San Francisco, particularly in the condo market. Sales of higherprice homes (mostly houses) have held up much better, but cooling demand is beginning to show up in pending-sale data. (Affluent buyers tend to be more affected by financial markets, which became very volatile in May.) Market changes are often uneven in the early months of a transition, with one home selling in days at well over list price, while next door, the seller has to reduce their price to get an offer. As markets cool, buyers become more discriminating; negative conditions previously ignored are noticed; more negotiation occurs; multiple offers and overbidding decline. Listings that are well prepared, show well, and priced right will have an increasing advantage.

The homes that are not selling quickly won’t affect overbid and days-on-market statistics until future months. The high appreciation rates of the last 2 years will almost certainly start to decline (which is not the same thing as an imminent decline in prices). After peaking in spring, activity in San Francisco typically slows through summer. Autumn usually sees another big, short spike in activity prior to the mid-winter slowdown. These are common seasonal dynamics, though other factors can come into play.

National Housing Market Reports

Being the center of high-tech industry and other unique local factors deeply affect Bay Area real estate, but the differences between local and national trends are generally more of degree than direction. General economic conditions and broad market trends up or down typically run on similar tracks across the U.S.

“Active inventory continued to grow, rising 11% above one year ago. In a few short weeks, we’ve observed a significant turnaround in the number of homes available for sale, going from essentially flat at the beginning of May to +11% in the last week of the month.” Realtor.com Report, June 6, 2022

“Pending contracts… better reflect the timelier impact from higher mortgage rates than do closings,” said Lawrence Yun, NAR’s chief economist. “The latest contract signings [in April] mark six consecutive months of declines and are at the slowest pace in nearly a decade’ With mortgage rates rising, Yun forecasts existing-home sales to wane by 9% in 2022 and home price appreciation to moderate to 5% by year’s end.” National Association of Realtors, May 26, 2022

“Mortgage rates continued to inch downward this week but are still significantly higher than last year, affecting affordability and purchase demand. Heading into the summer, the potential homebuyer pool has shrunk, supply is on the rise and the housing market is normalizing.” FHLMC (Freddie Mac), June 2, 2022

“Mortgage applications decreased to the lowest level since December 2018, as the purchase market continues to struggle with supply and affordability challenges… applications last week were 14 percent lower than last year, with more activity in the larger loan sizes. Demand is (still] high at the upper end of the market, (where] supply and affordability challenges are not as detrimental… as they are to first-time buyers.” Joel Kan, Mortgage Bankers Association, June 1, 2022

Statistics are generalities, essentially summaries of widely disparate data generated by dozens, hundreds or thousands of unique, individual sales occurring within different time periods. They are best seen not as precise measurements, but as broad, comparative indicators, with reasonable margins of error. Anomalous fluctuations in statistics are not uncommon, especially in smaller, expensive market segments. Last period data should be considered estimates that may change with late-reported data. Different analytics programs sometimes define statistics – such as “active listings,” “days on market,” and “months supply of inventory” – differently: what is most meaningful are not specific calculations but the trends they illustrate. Most listing and sales data derives from the local or regional multi-listing service (MLS) of the area specified in the analysis, but not all listings or sales are reported to MLS and these won’t be reflected in the data. “Homes” signifies real-property, single-household housing units: houses, condos, co-ops, townhouses, duets and TICs (but not mobile homes), as applicable to each market. City/town names refer specifically to the named cities and towns, unless otherwise delineated. Multi-county metro areas will be specified as such. Data from sources deemed reliable, but may contain errors and subject to revision. All numbers to be considered approximate.

Many aspects of value cannot be adequately reflected in median and average statistics: curb appeal, age, condition, amenities, views, lot size, quality of outdoor space, “bonus” rooms, additional parking, quality of location within the neighborhood, and so on. How any of these statistics apply to any particular home is unknown without a specific comparative market analysis. Median Sales Price is that price at which half the properties sold for more and half for less. It may be affected by seasonality, “unusual” events, or changes in inventory and buying trends, as well as by changes in fair market value. The median sales price for an area will often conceal an enormous variety of sales prices in the underlying individual sales.

Dollar per Square Foot is based upon the home’s interior living space and does not include garages, unfinished attics and basements, rooms built without permit, patios, decks or yards (though all those can add value to a home). These figures are usually derived from appraisals or tax records, but are sometimes unreliable (especially for older homes) or unreported altogether. The calculation can only be made on those home sales that reported square footage.

Compass is a real estate broker licensed by the State of California, DRE 01527235. Equal Housing Opportunity. This report has been prepared solely for information purposes. The information herein is based on or derived from information generally available to the public and/or from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy or completeness of the information. Compass disclaims any and all liability relating to this report, including without limitation any express or implied representations or warranties for statements contained in, and omissions from, the report. Nothing contained herein is intended to be or should be read as any regulatory, legal, tax, accounting or other advice and Compass does not provide such advice. All opinions are subject to change without notice. Compass makes no representation regarding the accuracy of any statements regarding any references to the laws, statutes or regulations of any state are those of the author(s). Past performance is no guarantee of future results.