The Big Story

July sees a huge mortgage rate drop and more inventory on the market

Quick Take:

• In July, the average 30-year mortgage rate declined significantly, by 0.50%, positively affecting affordability. Economists predict that mortgage rates have already seen their peak this year, near 6%, and will stabilize around the current rate of about 5%.
• Homebuyers had more inventory to choose from than this time last year, which indicates that the market is becoming healthier. 
• The economy feels uneasy, but the housing market isn’t showing signs of a major reversal.

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

Home prices continue to reach new highs even as demand declines

Home prices generally stagnate this time of year, so it’s more challenging to ascribe causation for why price growth has decelerated nationally to economic factors — inflation, mortgage rates, supply shortages, and looming recession — when they coincide with long-term seasonal trends. Historically, prices increase in the first half of the year and flatten in the back half. Prices in 2020 bucked this trend, increasing through October before flattening in the last quarter of the year. Although prices rose much higher in 2021, the historical trend returned. This year has, of course, come with different economic and psychological drivers than 2020 and 2021, especially in the housing market. 

For many, if not most of us, the pandemic brought us largely inside our homes, increasing the desire for larger, nicer private spaces. The mass movement to remote work meant that proximity to an office, usually a primary selling point in major metro areas, mattered less or not at all. Many of us experienced our home spaces, work spaces, and communal spaces becoming one, and realized that the home we usually spent little time in would simply no longer work for us. This need for a bigger space, combined with extremely low-rate financing, a substantial increase in disposable income, and more time to look for a new home created a boom in demand in an already undersupplied housing market. As a result, the median sale price rose higher and faster than any other point in history, up 36% over the past two years according to data provided by the U.S. Department of Housing and Urban Development. For reference, in the eight years preceding 2020, the median home price rose a total of 38%. 

As we know, housing isn’t the only asset to rise since 2020. Nearly everything has become more expensive, and inflation (CPI)*, which has rarely ever risen above 5%, ticked above that mark in the summer of 2021 and has only increased since then. The Federal Reserve, which has a dual mandate of price stability and maximum employment, has one major tool: raising the federal funds rate†. By doing so, the Fed indirectly affects the debt markets, thereby increasing other interest rates, such as mortgage rates. 

In the first half of this year, the average 30-year mortgage rate rose nearly 3%. It’s hard to overstate how significantly that rate increase affects affordability. To hopefully simplify the explanation, we will use a $1 million home that is fully financed for illustrative purposes. For a $1 million home, a 3% increase in interest rates raises the monthly mortgage cost by 42%. It’s fairly safe to say that income hasn’t risen by 42% for most people, which means that many potential buyers are priced out of buying homes, softening demand. For those potential buyers waiting for a correction of the residential real estate market, home prices would have to decline by 30% for the monthly costs to be equivalent — that is, $700,000 at 6% is the equivalent monthly mortgage cost of $1 million at 3%. If the housing market experienced such a large correction, there would likely be much larger concerns in the global economy than home prices. Barring a collapse of the entire financial system, supply would simply be too low for a major correction. Luckily for potential homebuyers, mortgage rates dropped by 0.50% in July, and many economists predict that the mortgage rates will flatten out around 5% even as the Fed continues to raise the federal funds rate. This is partially because the market largely understands and has already accounted for the Fed’s rate hike path, which will continue until inflation begins to meaningfully decline and recession worries wane. 

The economy has felt a little uneasy lately — a classic “will they, won’t they?” when it comes to the recession — but for now, we aren’t technically in a recession because job numbers are too good. Demand for homes has clearly softened, which is fine in a severely unbalanced market. We will likely see less significant price appreciation in the second half of the year due to seasonal norms and higher mortgage rates. The market remains competitive and homes are selling quickly. However, buyers are seeing more inventory than last year, which is good for the market. As always, we will continue to monitor the housing and economic markets to best guide you in buying or selling your home.

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* The Bureau of Labor Statistics (BLS) collects the prices of approximately 94,000 items from a sample of goods and services to calculate the Consumer Price Index (CPI).
† The federal funds rate is the interest rate that banks get to borrow from the Federal Reserve. Also known as the Fed’s benchmark rate or the risk-free rate. 

Big Story Data

The Local Lowdown

Quick Take:

• The median single-family home price in San Francisco declined sharply after a similarly rapid rise earlier this year.
• Demand for homes is clearly softening, as sales declined substantially month-over-month.
• New listings declined in July, which means that inventory in 2022 will likely peak at historically low levels.

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

Is the market balancing? Tentatively, maybe!

The median single-family home and condo prices in San Francisco continued to decline from their peaks reached earlier this year. These movements are within the bounds of normal price variability, but after large price gains, it feels like any downward movement signals a market correction. These larger median price moves are partially a sampling issue in that as sales (the sample) have decreased, more outliers can rise to the surface. For example, the homes sold in July were much smaller than an average month, which dropped the median sale price more than we would’ve expected. But that’s not to say prices haven’t come down.

As mentioned in the Big Story, prices tend to stagnate or contract in the summer and fall months when inventory is at its highest, so we aren’t ringing the alarm bells quite yet. Homes over the past five years have become less affordable, yet demand boomed. With 30-year mortgage rates potentially settling around 5%, fewer potential buyers will participate in the market than they did last year when mortgage rates were at all-time lows. 

Supply is still historically low, which will protect prices from experiencing a major downturn. Prices will likely follow a similar trend as last year, holding relatively steady through the summer and fall months. If you’re following home prices closely, as we tend to do, you don’t need to worry about losing equity in your home, or softening demand, or even an official recession — so long as it doesn’t affect your job. The housing market remains strong in San Francisco.

Sales slowdown

San Francisco’s housing inventory has been in decline since March, which indicates that 2022 will likely have the lowest inventory on record. We entered 2022 with the lowest inventory in history, but the number of homes for sale rose over 50% from December 2021 to March 2022, only to trend back toward all-time lows. Over the past 20 months, inventory has trended lower and settled at a depressed level. The number of single-family homes on the market in July 2022 is 50% lower than in July 2020, with 33% fewer condos. San Francisco is particularly sensitive to rate hikes due to the high absolute dollar cost of housing. 

The substantial drop in sales and new listings, down 29% and 30%, respectively, from June to July 2022 indicates that demand is softening. We aren’t saying that demand is low, but it’s trending closer to balanced between buyers and sellers than we’ve seen in years.

Months of Supply Inventory for single-family homes and condos diverge

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). Notably, single-family home MSI has trended slightly lower over the past four months, while condo MSI has risen slightly. Single-family homes are still experiencing a sellers’ market, while condo MSI indicates a more balanced market. 

Local Lowdown Data

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The Big Story

Mortgage rate increases slow; housing stays hot

Quick Take:

• Record high home prices continue in the face of rising mortgage rates and record inflation. All-cash sales jump because buyers want to avoid higher rates and maximize purchasing power.
• The housing market is roughly four to five years behind on building new homes, which means the supply issue isn’t ending soon.
• Although more homes are coming to market, and demand is softening marginally as mortgage rates rise, prices are still moving higher as buyers compete over the new inventory.

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

Prices continue to rise as mortgage rates hit 13-year highs

It’s become hard to accurately describe the state of the housing market in the face of rising rates, historically low supply, and high but softening demand. Real estate professionals often say the market is cooling to indicate a turn from a sellers’ to a buyers’ market, but that feels like an overstatement. Additionally, some recent articles were published with titles like “Cracks in the Housing Market,” which also may make the reader erroneously think we are headed into a major correction. After much deliberation, we decided to define market hotness with a pepper analogy. The current market is going from the hottest pepper in the world, the Carolina Reaper, to the second hottest, the Trinidad Moruga Scorpion. Yes, the market is technically becoming less hot, but it’s still about as hot as it gets. Ultimately, we believe we are headed toward a steadier state of growth rather than a significant home price reversal. Home prices will still fluctuate month-to-month, which is normal, but they will generally trend higher at a slower pace. A slower growth rate is a healthy growth rate. 

In May, home prices increased around 16% year-over-year, which means that prices would double every 4.5 years if that trend were to continue. That kind of rapid growth is simply unsustainable and would eventually lead to a major market collapse. Based on what happened as a result of the 2006 housing bubble, we know that mass wealth destruction is not the path we want to take. The Federal Reserve (the Fed) is actively raising rates to bring down the growth rate by making borrowing more expensive, thereby lowering demand. Luckily, we are starting to see inflation respond to the Fed’s monetary policy, although it is still near a 40-year high. 

In 2022, mortgage rates have moved about 2% higher for 30- and 15-year fixed mortgages, reaching 5.09% for the average 30-year fixed-rate mortgage and 4.32% for the average 15-year fixed-rate mortgage as of June 2, 2022. Every 1% rate increase raises the monthly mortgage payment significantly — by about 13%. In this environment of rising rates and rising inflation, all-cash purchases become more attractive because financing is more expensive and money is worth less over time. In the first quarter of 2022, all-cash purchases increased, reaching the highest levels since 1988. Economists now estimate that the average 30-year mortgage rate could climb above 6% in 2022. Because the Fed indicated the path of rate hikes for the rest of the year, we expect that mortgage rates will, at most, reach around 7% this year for prime borrowers. 

If it feels like you missed a unique opportunity to finance a home at under 5%, we are sorry to say that you did. However, you are in good company and can still take advantage of low rates. While it can feel like rates are high when they’ve risen from the all-time low of only a few months earlier, a rate of 5% is still historically low. Since 1971 (the start of the data set), we’ve had 2,671 weekly 30-year mortgage data points, only 24% of which reflected rates below 5%.

The market has remained so hot because of supply — or lack thereof. In May, the housing supply ticked up ever so slightly but is still 49% lower than the number of homes on the market in May 2020. We are entering what is traditionally the hottest time of year for the housing market with a record low supply of homes. Through May 2022, which had the lowest inventory on record, home prices increased 15%. The chief economist at Realtor.com, Danielle Hale, explains that the market is about 5.8 million single-family homes short, which means we’re four to five years behind in building new homes. Although single-family housing starts — homes that have begun construction — have slowed recently, multi-unit housing (5+ units) starts have reached their highest numbers since 1986.

If you are considering buying a home, there aren’t many reasons to wait. Home prices and rates are still rising. The low but rising supply continues to make the market extremely competitive. We are starting to see some softening in demand, but not nearly enough to balance the supply side of the market.

Big Story Data

The Local Lowdown

Quick Take:

• Single-family home prices in San Francisco landed just below the March high, while condo prices fell from the April peak.
• The second quarter of 2022 will indicate whether the market is moving toward or away from normalization. May data show that the number of homes for sale declined, which indicates that inventory will likely remain historically low this year.
• Demand for homes in San Francisco has yet to be diminished by rising mortgage rates and historically low inventory.

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

Home prices continue to rise as new listings meet high demand

The median single-family home price rose in May, landing just below the all-time high reached in March, while the median condo price declined from the April peak. Rising rates haven’t brought down home demand so far, and in a rising rate environment, buyers are better off locking in an interest rate sooner rather than later. Since the start of 2022, the average 30-year mortgage rate has increased 2%, which equates to a 27% increase in monthly mortgage payments. Yet prices keep moving higher. 

One reason that home prices continue to rise is that buying a home is not only a financial process but also an emotional one. Over the past two years, our homes have become such a large part of our lives, with many of us moving to permanently remote or hybrid work. As more homes come to the market, as is typical in the first half of the year, buyers are more likely to find the home that’s right for them in what’s been an incredibly competitive market. Even with increases in mortgage rates (which, again, are still historically low), it’s reasonable to pay more for the well-being that comes with buying the right home. For most of us, our home is our largest asset and store of wealth, so treating it as such makes sense.

Declining inventory, way ahead of schedule

San Francisco’s housing inventory declined in May for the second month in a row, which serves as an early indicator that home supply will remain significantly depressed this year. The high demand and lack of new listings over the past year brought single-family home and condo supplies to record lows as we entered 2022. Although the first quarter of 2022 had one of the lowest inventories on record, we were pleased to see that inventory increased, a trend that usually holds until mid-summer. But with inventory reversing in April and May, the likelihood of a strong inventory increase is slim. 

Even though inventory is low, sales remain relatively high, outpacing new listings for both single-family homes and condos. Sellers can expect multiple offers, and buyers should come with competitive offers.

Months of Supply Inventory further indicates high demand and low supply

Homes are selling faster than ever. Buyers must put in competitive offers, which, on average, are 14% above the list price for single-family homes and 6% above list 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 average MSI is 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). Currently, single-family home and condo MSIs are low, indicating a strong sellers’ market.

Local Lowdown Data

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The Big Story

Will rising rates normalize the housing market?

Quick Take:

• Home prices in the United States hit a record high. Historically low inventory, coupled with an urgency around rising interest rates, incentivized homebuyers to buy sooner rather than later.
• Inflation is driving the Federal Reserve’s (the Fed’s) monetary policy. The Fed indicated at least six more 0.25% federal funds rate increases this year, so as to reach the consensus-estimated federal funds rate of 1.9% by year’s end. 
• The average 30-year fixed mortgage rate rose 1.56% in the first quarter of 2022, ending March at an average of 4.67%. The average 30-year fixed mortgage rate hasn’t risen above 5% in over a decade, but it will likely reach this milestone in the second quarter of 2022.  

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

Early innings for rising rates

Mortgage rates rose faster than expected in the first quarter of 2022, already surpassing forecasts for the year. The 30-year average mortgage rate rose swiftly in the two weeks after the Fed’s March meeting, up 0.5% between March 17 and 31 to 4.67%. This rapid increase has spurred purchases as buyers try to lock in lower rates before they climb higher. The data reflect the urgency buyers face. Nationally, home prices have reached yet another milestone: hitting above $200 per square foot, the highest level in history. But is the urgency justified? The answer is 100% yes, assuming you find the right home for you. Let’s dig into the numbers a little.

The average 30-year mortgage rate was 3.11% in December 2021, rising to 4.67% by the end of Q1 2022. If you bought a home in December and financed it with a $500,000 mortgage loan at 3.11%, your monthly spend on principal and interest would be $2,138 — versus $2,584 if you got the same loan in March 2022 at 4.67%. Over the life of the loan, you’ll spend $160,560 more at 4.67%. In short, every percentage point matters significantly. As an aside, refinancing has decreased 60% below last year’s levels, according to the Mortgage Brokers Association. Economists and real estate experts seem torn between rates peaking just below or just above 5%. Because the Fed indicated the path of rate hikes for the rest of the year, mortgage rates increased in anticipation and are likely to be affected less when the Fed moves the federal funds rate in the future, if it sticks to its schedule. At this point, we can almost guarantee that rates will not decline substantially this year.

As we look at historical trends in inflation, we are curious about how effective the Fed’s rate hikes will be. Rates rose significantly in the 1970s, partially due to the inflation rate at the time. Mortgage rates peaked at over 18%, which is unimaginable today. As we look at the long-term data, we see that inflation tends to decline when the federal funds rate is above the inflation level. Currently, the federal funds rate is far below inflation, and the Fed doesn’t plan to lift it near the inflation level because of the economic shock that would ensue. The current cost to borrow is actually negative, which may incentivize more people to borrow and spend more in the short term, driving inflation higher. At current mortgage and inflation levels, the borrower, not the lender, gains around 3% from borrowing.

In addition to rising rates, supply still drives home prices. In March, the housing supply ticked up ever so slightly from the all-time low in February. We are entering the spring buying season, however, with the lowest inventory on record. From March 2020 to March 2022, the housing supply declined 62%. Over the past three months, which had the lowest inventory on record, home prices increased nearly 10%. Rising rates, in the short term, boost demand because potential homebuyers want to get ahead of the increase, but in the long term, they reduce demand. Because the market is so undersupplied, less demand is actually a good thing. Home prices simply cannot maintain the rapid increases. Although a housing bubble isn’t likely yet, a sustainable growth rate is better and safer for the long term.

Big Story Data

The Local Lowdown

Quick Take:

• Home prices continued to climb in March, reaching an all-time high for single-family homes in terms of both median price and price per square foot. Condo prices didn’t return to peak, but they are historically high.
  • Single-Family Homes: +22% year-over-year
  • Condos: +3% year-over-year
• Inventory is rising, a historical seasonal norm. However, we are entering into the spring season with the lowest inventory on record in San Francisco.
• Months of Supply Inventory further indicates a sellers’ market. Homes are selling quickly as buyers compete over the limited inventory.

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

Home prices close the first quarter at record highs

Single-family home and condo prices rose significantly over the past two months, reaching an all-time high for single-family homes. Because sales often have a one-month lag, with homes going under contract around a month before the sale is complete, we cannot yet determine how significantly increasing rates have hit the market. Mortgage rate hikes really only lower demand in the long term, but in the short term, demand increases as buyers try to lock in a lower rate. The San Francisco housing market has a major advantage in that high demand is constant. Despite the huge increases in home prices over the past 12 months, San Francisco’s lack of housing supply will keep prices rising in the coming months.  

The Fed is expected to raise interest rates by 0.25% at least six times this year, going from 0% to 1.90%. We are now entering a period where factors that affect prices are more mixed, unlike the past two years when all the factors caused prices to increase. Rising interest rates, which will hopefully curb the still-rising, 40-year-high inflation rate, will make homes less affordable and dampen demand over the course of the year. But inventory is so low that even with less demand, the market will likely remain undersupplied. It might seem counterintuitive that home prices can still appreciate after increasing so much over the past two years, but with inventory at record lows, home prices in 2022 will still increase — though at a slower rate than in 2021. With high sales relative to the available inventory, we anticipate a competitive market in the year ahead.

Low, but rising, inventory

San Francisco, like the rest of the country, has a historically low housing inventory. The sustained high demand and lack of new listings over the past year brought single-family home and condo supplies to record lows across markets. Although the first quarter of 2022 had the lowest inventory on record, we are pleased to see that inventory is increasing. If this upward trend continues into the second quarter, that will be a large indicator that the housing market is normalizing. 

Sales have still been incredibly high, especially when accounting for available supply, again highlighting demand in the area. Sellers can expect multiple offers, and buyers should come with competitive offers. The incredibly high demand we’ve seen over the past year might wane as interest rates increase; however, the supply is so low that the market can handle a drop in demand without negatively affecting prices. The 30-year average fixed-rate mortgage hasn’t climbed above 5% yet, but it almost certainly will. If mortgage rates reach 5%, demand will likely decline more substantially. In the next few months, demand will remain high relative to available supply.

Months of Supply Inventory further indicates high demand and low supply

Homes are selling extremely quickly in these luxury markets. Buyers must put in competitive offers, which, on average, are 16% above the list price for single-family homes and 6% above list for condos. 

Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes for sale on the market to sell at the current rate of sales. The average MSI is three months in California, which indicates a balanced market. An MSI lower than that 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). Currently, single-family home and condo MSIs are exceptionally low, indicating a strong sellers’ market.

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The Big Story

Mortgage Rate Hikes Now Definite

Quick Take:

• The Fed almost certainly will raise rates in March in an effort to combat inflation.
• Historically low supply is protecting the record-setting home prices of the past two years from a reversal.
• Elevated real disposable income, which spiked asset prices, has declined and stabilized at normal levels. 
• The average 30-year fixed mortgage rate is rising as the expected Fed rate hikes have become definite.  

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

The Fed Dual Mandate

On January 26, 2022, the Federal Reserve (the Fed) indicated that it would raise the federal funds rate as soon as March for the first time in over three years. The Fed adjusts the federal funds rate to influence broader interest rates, which directly affect the borrowing costs of banks. Generally, if bank borrowing costs are low, consumer borrowing costs will be low(er), and vice versa. The Fed uses interest rates in particular as a tool to meet its dual mandate of maximum employment and price stability. Employment and price stability are long-term indicators for home prices. 

We will start with the good news. Employment rebounded considerably from the highest spike in unemployment in modern history in spring 2020 to pre-pandemic levels by December 2021. As you might imagine, high unemployment rates for extended periods lead to less overall wealth: Fewer people buy homes, and more people experience foreclosures, thereby lowering home prices. Although unemployment seemed dire in 2020, employment is now on solid ground. If we view the current record-high 10.5 million job openings, along with the nearly 10 million new businesses created over the past two years, we get a better understanding of why unemployment dropped so significantly despite a record number of job openings. Simply put, people are working, and that is good for individual wealth and the larger economy. 

On to the kind-of-good, kind-of-bad news … rising mortgage rates could help curb inflation and create a more balanced housing market (although 2022 will surely be a sellers’ market), but it will make homes more expensive monthly, hitting first-time homebuyers the hardest. With the federal funds rate at 0% and inflation at a near-40-year high, rate hikes are expected to combat inflation. Essentially, when the cost to borrow increases, fewer people want to borrow, leading to less consumer spending (less demand), which lowers prices. We can look to the last inflationary period, the 1970s, as a loose guide. Inflation today is likely to be much more transitory than it was in the 1970s, but we can still expect a rise in mortgage rates like we saw then. Luckily, however, we will certainly not reach the 18+% mortgage rate that we saw in the early 1980s. As it was then, the Fed is obligated to do something now. While we wish that we could always be in periods of high employment, low inflation, and low interest rates, as we experienced for nearly a decade before the pandemic, we must recognize the atypical nature of that period. 

As we enter this new chapter of rising mortgage rates, we don’t expect home prices to change significantly, if at all, because supply is still such a driving factor. In December 2021, there were 57% fewer homes on the market than in December 2019. The low supply means that demand can decline without affecting prices. Does it matter if 10 offers drop to five? Probably not, and it might even create a better market. Sellers tend to become buyers, so unless you’re a first-time homebuyer, you’ll likely experience both sides of the market. Because sellers are often selling one home and buying another, it’s essential that sellers work with the right agent to ensure the transition goes smoothly. 

We don’t expect price appreciation to see the record gains we experienced over the past two years, but we do expect home prices to increase. Another factor at play over the past two years was a sharp increase in disposable income, which has now normalized. People had more money to spend over the past two years, and we saw that throughout markets: The housing market, the stock market, cryptos, art, jewelry, etc. all reached record high prices. As disposable income has dropped to a more normal level, we can expect assets to appreciate at a more normal pace.

If you have 30 minutes, Ray Dalio’s video How the Economic Machine Works is well worth watching.

Big Story Data

The Local Lowdown

Quick Take:

• Although home prices have contracted over the last six months, they remain historically high. Year-over-year, single-family home prices rose 4%, while condo prices decreased 2%.
• Home sales remained elevated despite historically low inventory, which reflects the high demand in San Francisco.
• Months of Supply Inventory further indicates a sellers’ market. Homes are selling quickly as buyers compete over the limited inventory.

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

Home price movements in a rising rate environment

The single-family home market in San Francisco began the year below all-time highs as the market cooled from the huge price gains at the beginning of 2021. After prices appreciated significantly in the first half of 2021, it made sense that price appreciation would slow or reverse in the second half of the year, a trend that has continued into 2022. The housing market in San Francisco, however, has a major advantage in that a large number of affluent people simply want to live there, which has reduced inventory to record lows. 

The median condo price dropped significantly in January, which gave cause to dig more into the numbers, as price per square foot increased slightly from December 2021 to January 2022. Usually, median price gives an excellent barometer of the overall market, but it is also subject to outlier months. Nearly twice as many homes sold in December than in January, and, of the condos sold, January had a far higher percentage of condos with one or fewer bedrooms. This skewed the median price downward. Long story short, condo prices didn’t actually decrease in January. The pandemic hit demand for condos harder than single-family homes in San Francisco. However, sales indicate that demand is back, although we expect price appreciation to slow as we move through the winter months, a seasonal norm.

Mortgage rate hikes really only move demand in one direction: lower. We are now entering a period during which factors that affect prices are more mixed, unlike the past two years when all the factors caused prices to increase. Rising interest rates, which will hopefully curb the still-rising inflation, will make homes less affordable and dampen demand. But inventory is so low that even with less demand, the market will likely be undersupplied. It might seem counterintuitive that home prices can still appreciate after increasing so much over the past two years, but with inventory at record lows, home prices in 2022 will still increase — though at a slower rate than in 2021.

Record low inventory in San Francisco

We entered 2022 with historically low inventory. The sustained high demand and lack of new listings over the past year brought supply to record lows across markets. We are seeing that far more people want to live in San Francisco than want to leave. Sales have been incredibly high, especially when accounting for available supply, again highlighting demand in the area. Sellers can expect multiple offers, and buyers should come with competitive offers. The high demand we’ve seen over the past year might wane as interest rates increase; however, the supply is so low that the market can handle a drop in demand without negatively affecting prices.

Months of Supply Inventory further indicates high demand and low supply

Homes are still selling extremely quickly. Buyers must put in competitive offers, which, on average, are 11% above the list price for single-family homes and at list for condos. 

Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes on the market to sell at the current rate of sales. The average MSI is 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). In January, MSI remained low for single-family homes in San Francisco, indicating a strong sellers’ market, but rose considerably for condos. Notably, the January increase in MSI is less instructive than usual — sales slowed because inventory is so low, not because of lack of demand. It’s still a sellers’ market for both single-family homes and condos.

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