Bay Area Home Prices Becoming More "Normal"

After two years of soaring home prices, the Bay Area housing market may have entered a cooling phase as rising mortgage rates put a squeeze on buyers.

But that doesn’t mean home values are suddenly falling back to Earth. Far from it. The median price of existing single-family houses in the region hit a record $1.36 million in May, a 13% increase from the same month last year, according to the latest data from real estate analytics firm CoreLogic.

Even so, housing experts say the breakneck pace of year-over-year price growth appears to have peaked – though few are predicting a housing crash on the horizon.

“We’re just seeing more of a normalizing to pre-pandemic conditions,” said Selma Hepp, CoreLogic deputy chief economist. “It wasn’t sustainable.”

CoreLogic forecasts annual home price growth in the Bay Area will decline to single digits by next summer. In other words, prices are still expected to go up across the region compared to the year prior, just not as quickly as before.

Hepp pointed to rising mortgage rates as a key factor. The cost of a 30-year fixed-rate jumbo home loan has in recent months jumped to around 5.7%, according to personal finance site Bankrate.com. For most of the Bay Area, a mortgage is considered jumbo if it’s more than $970,800. Though the 30-year rate has dipped the past few weeks, it’s still about double the roughly 3% historic-low charge available for most of the pandemic.

“Now that mortgages are much higher and the cost of ownership has gone up (significantly) from only a few months ago, it has had an impact on demand,” Hepp said. “With fewer buyers out there, what we’re starting to see is more price reductions and more homes staying on the market longer.”

In San Francisco, Santa Clara and San Mateo counties, that dynamic likely contributed to home prices falling slightly for the first time this year from April to May.

All three counties still saw large year-over-year gains: San Francisco increased 9% to $1.89 million, Santa Clara grew 18% to $1.8 million, and San Mateo was up 14% to $1.99 million.

Ramesh Rao, a real estate agent with Coldwell Banker Realty in the South Bay, said over the past few months he’s seen homes regularly going for under the asking price. That was unthinkable over much of the past two years as house hunters, many untethered from the office by remote work and seeking more living space, made all-cash offers and bid hundreds of thousands of dollars over asking in a mad scramble driving up home prices.

As the Federal Reserve is expected to continue raising borrowing costs to combat inflation, Rao said competition could soften even more.

“My advice to all clients if they’re sellers is: Today is better than tomorrow,” he said.

Hot Bay Area Housing Market Begins to Cool

Five of the 10 U.S. housing markets that have cooled fastest this year are in northern California–San Jose, Oakland, San Francisco, Sacramento and Stockton–and three of those five are in the Bay Area. All 10 of the housing markets cooling fastest are in the American West. The cooldown is largely because mortgage rates nearly doubled in the first half of the year, reaching nearly 6% in June. That caused the monthly mortgage payment for a typical homebuyer to surge 45% year over year to $2,459 in June and priced many buyers out of the market.

The cooldown comes after the housing market soared to new heights during the pandemic, largely fueled by record-low mortgage rates and remote work.

“The housing market has changed drastically in the last month because higher rates make homes even more expensive than they used to be. At the same time, fewer people can afford pricey homes because of the volatile stock market,” said San Francisco Redfin agent Joanna Rose. “In the early spring, every home was selling over its asking price with multiple bids. Then the number of people attending open houses dropped from 20 to two, and now some homes are sitting on the market for over a month and selling for under asking price. Supply is starting to pile up.”

Northern California’s housing market is cooling faster than anywhere else in the country

San Jose is cooling at the fastest clip, with measures of homebuyer demand and competition dropping off quicker than any other major metro this year. The supply of homes for sale in San Jose was up 10% year over year in May–but just three months earlier in February, supply was down 43%, indicating that buyers are now gobbling up fewer homes. And the share of homes that went off the market in two weeks was down 5% year over year in May, a big swing from the 22% year-over-year increase in February–that’s an indicator that homes are selling slower.

After San Jose, Sacramento is cooling fastest, followed by Oakland. Stockton, CA, located about 50 miles south of Sacramento, comes in at number five, and San Francisco is number 10.

The Bay Area is cooling quickly due to high mortgage rates, which hit pocketbooks harder in pricey areas, and the slumping stock market, a factor that’s particularly impactful in tech hubs where a lot of residents are compensated with equity. Sky-high home prices are another factor pricing many would-be buyers out of the market. San Jose, Oakland and San Francisco are the most expensive metros in the U.S., with the typical home selling for over $1 million and many selling for well over $1.5 million.

In dollar terms, mortgage rates reaching nearly 6% in the spring had a particularly big impact in pricey areas like Northern California. The typical monthly mortgage payment on a million-dollar home is roughly $5,750 with a 6% interest rate, $1,400 higher than it would be with a 3% interest rate (assuming a 20% down payment). The increase is half as big with a home priced close to the national median: The typical monthly payment on a $450,000 home is about $2,600 with a 6% rate, about $700 higher than with a 3% rate.

“But there is good news for some buyers. People who can afford to buy right now could get something for $100,000 or $200,000 less than a few months ago, largely because homes are often no longer selling above asking price,” Rose continued. “They’ll have a higher monthly payment for now due to the rise in mortgage rates but can refinance later if rates come down.

Nationwide Home Prices Begin to Cool

Home sellers are slashing prices as the housing sector cools, according to a research from a real-estate data firm.

More than 25% of homes on the market right now have cut their price, Altos Research found, which is in stark contrast to how prices have been climbing over the last two years. 

“Rising rates and the shift in the economy has slowed down the super-eager buyers,” Mike Simonsen, co-founder and CEO of Altos Research, a real estate analytics firm, told MarketWatch. “And what we’re feeling is the speed of the shift.”

Put bluntly: “We’re shifting from a real buying frenzy to much more normal conditions,” he added.

Adding to the cooling off: On Wednesday, the U.S. Federal Reserve raised the benchmark interest rate by 0.75 percentage point, the biggest increase since 1994 as it tries to tame rising inflation from a 40-year high.

The U.S. housing market boom amid the pandemic was felt across the country. In a high-demand area like San Jose, California, the typical home was valued at $1.5 million, as of May 31, according to Zillow. That’s up 23.7% from the previous year. In May 2020, the typical home in the Bay Area was valued at $1.09 million.

Under normal conditions, about a third of homes listed on the market for sale take a price cut before they’re sold, Simonsen explained, and when the market is hot, that drops down to 25%. This spring, however, only 14% of homes on the market took a price cut. And that’s a reflection of high demand and low inventory.

“Sellers in the last two years can overprice their home and still get offers — that condition of the frenzy is gone, so it’s a much more normal market,” Simonsen said.

With buyers slowly backing off, that percentage is now climbing, a trend also supported by research from Redfin, a real-estate brokerage. Some 21% of sellers dropped their list price during the four weeks ending June 5, which was the second-highest share on record, going back to 2015, Redin said.

Sellers will need to lower their asking price by summer’s end. “By July, expect to be back to our normal conditions nationally,” Simonsen added. “We’ve been hotter than normal for over two full years since the start of the pandemic. By August, sellers who aren’t prepared will be surprised.”

Good news for first-time home buyers

The median sales price of a house sold in the U.S. was still at a record high of $428,700 in the first quarter of 2022, up from $313,000 in the first quarter of 2019 before the COVID-19 pandemic, according to data from the St. Louis Fed. Simonsen said the magnitude of price cuts could vary, from $5,000 upwards, depending on the value of the house.

For first-time house buyers, who have seen prices gradually rise out of their reach over the last two years, there could be some relief. “If people want to buy a home, they would get outbid by maybe somebody with all-cash, or an investor,” Simonsen said. “But now, selection is increasing, competition is decreasing, and they finally have some opportunities to buy.” 

But don’t expect prices to hit rock-bottom just yet. “There is nothing in the data yet that shows an indication of home prices crashing,” Simonsen said. But “there is an indication of probably zero home price appreciation in 2023.”