At roughly a month into the spring selling season, the San Francisco Bay Area's real estate market is showing resilience and strength despite ongoing challenges. Here are my thoughts on what's happening and what to expect for potential home buyers and sellers in the region.
What We Are Seeing So Far This Year:
- We are seeing early price appreciation. The median sales price for a single-family house in Santa Clara county was up 5.9% in February, month-over-month.
- Other metrics such as the sales-to-list ratio and days on market also indicate a strengthening market.
- Anecdotally, open house traffic is up while non-contingent offers and multiple offer situations are increasing.
- We are not seeing meaningful improvement in inventory. Rates are still so high that a lot of sellers are delaying moves or holding onto properties because they have attractive financing.
Key Drivers at Play This Year:
Several key factors are shaping the dynamics of the Bay Area housing market in 2024:
- Supply/Demand Imbalance (Upward Price Pressure): The perennial issue of insufficient housing supply relative to demand remains a significant driver of market dynamics. Despite factors like remote work and tech layoffs, the imbalance continues to underpin prices.
- Interest Rates (Upward Price Pressure): While there was optimism at the start of the year due to lower rates in late 2023, recent Fed guidance on smaller and later rate cuts has tempered expectations. However, potential rate cuts in the second half of the year could bring a lot more buyers off the sidelines and lead to a longer and more competitive fall season.
- Impact of AI (Upward Price Pressure): The burgeoning influence of artificial intelligence in the region's tech landscape is driving job growth and investment in local companies and, consequently, housing demand and prices.
- Stock Market Performance (Mixed Effect): The Bay Area's housing market is closely tied to the performance of the tech sector. A buoyant stock market provides support for home prices, while any significant corrections could have adverse effects.
- Pent-Up "Life Event" Supply (Downward Price Pressure): Life events such as births, deaths, marriages, and divorces often precipitate housing changes. While some sellers may have delayed in the short-term due to favorable financing, these events ultimately will contribute to inventory levels.
Other Considerations:
- A possible recession later in the year could prompt further rate declines, benefiting housing affordability.
- Demographic shifts, with more people entering their 30s than in the last two decades, and capital flows from other asset classes as yields decline could increase demand and home prices.
- Historically high debt-to-GDP ratio may be compounded by political risk from new presidential term and associated spending plans, which could impact interest rates and consequently the housing market.
- Data argues against a bubble. Stronger lending standards mitigate foreclosure risks, while consumers' substantial home equity adds stability.
Key Takeaways:
- Price appreciation: The median price in February was up almost 6% over January with additional appreciation likely (mid-single-digit range) through the remainder of the year. Moreover, if rates decline in the second half of the year, moving more buyers off the sidelines, the fall season could be stronger than normal.
- While sales volume will likely increase slightly compared to 2023, it is unlikely to reach pre-pandemic levels due to lingering high interest rates. As adjustable rate mortgages with sub-4% rates start to reset in the next few years, this effect will be reduced somewhat.
- The current market may not match the intensity of the post-pandemic boom but will still be competitive.
Implications for Buyers and Sellers:
Buyers:
- Consider buying earlier to capture some appreciation when interest rates decline and then refinance in a year or two.
- Be prepared to compete with a strong offer, including fully underwritten pre-approvals. (Before looking at houses, I guide my buyers through an offer workshop where we discuss how to assemble a winning offer. This includes a fully underwritten pre-approval if financed.)
- Do not underestimate the increased demand when rates decrease. Higher prices may eliminate any benefits from lower rates.
Sellers:
- Expect appreciation and potential benefits from a strong fall season.
- Evaluate motivations for holding real estate, balancing financial considerations such as maintaining attractive financing with personal satisfaction.
- Plan ahead to maximize the value of your property. With higher rates, buyers do not have a lot of leftover cash to do remodel projects. Turnkey properties are receiving more demand and a greater premium right now as a result. Utilizing Compass Concierge, my sellers can complete upgrades without paying for them until closing.
For those looking to sell and buy simultaneously, bridge loans, investment margin loans, and contractual terms such as a rent-backs and sale contingencies may be helpful. There are nuances to each of these options, and specific lenders are better than others for bridge loans. Please contact me if you would like some guidance.
Navigating the Bay Area's dynamic housing market requires strategic insight and expertise. If you're considering buying or selling, reach out to discuss your optimal timing and strategy. Together, we can navigate the complexities of the market to achieve your real estate goals in 2024.
