As I’m sure you’ve been reading and watching on YouTube, there’s a slowdown happening in the Bay Area Housing Market. Things are changing in our market, and we’re in a transition period.
We’re going to digest what exactly we’re seeing on the ground. We will marry those observations with a slew of stats that we’ve researched. Then, we will give you the advice that we see working in the current market landscape. Hopefully, this will bring you the needed value for you to be as successful as possible here in this market.
Interest rates have gone up significantly.
Let’s dive right into the thing that’s on top of everybody’s minds regarding real estate—interest rates. We all know that interest rates have gone up significantly and are affecting several things.
Over the past year or so, we might all have heard that there’s so much inflation happening within the economy. Due to inflation, the Fed has been increasing its rate, which then trickles down to the long-term borrowing rates. As a result, over the past year or so, we’ve seen interest rates nearly double.
Interest Rates: Long-Term vs. Short-Term
There are two ways to look at interest rates: short-term and long-term. From the short-term perspective, as of September 15, 2022, the 30-year Fixed Rate Mortgage (FRM) average is around 6.02%. That is twice as much as the 30-year FRM average of 2.96% on June 10th of last year. We even saw rates go down as low as 2.66% on December 24, 2020, which is just crazy. It is just historically unheard of and probably won’t happen again, at least in the near future.
On the other hand, from a long-term perspective, our interest rates today are actually around what’s considered average. If we look at the overall average from 1992 to 2022, we’re actually sitting at about the middle. Our interest rate today is sitting around that 5.5%–6.5% range when you look at the long-term borrowing history and the long-term interest rates for a 30-year fixed mortgage.
So, in the short term, you’re seeing this huge increase, which is obviously affecting affordability. However, in the long term, what we’ve seen is that it’s actually pretty stable. It is also pretty typical for our interest rate to be within that 5.5%–6.5% range.
Interest rates have affected affordability.
The increase in interest rates has affected the affordability of houses in the US since, as we all know, an increase in interest rates also means an increase in the total mortgage payment. Based on the table above, we see that households in the Bay Area had to make a minimum of $248,000 in Q2 of 2021 to afford a median-priced home. In 2022 Q2, the minimum annual income for households in the Bay Area increased to $337,000. That means that households have to make $89,200 more compared to 2021 to afford the same home. So, this increase in interest rates has really affected households and families on a large scale.
The same can be said for mortgage payments, which consist of principal, interest, taxes, and insurance (PITI). As seen from the table above, the monthly PITI in the Bay Area alone in Q2 2021 was $5,270. It increased by 36%, or equivalent to $3,160, to $8,430 in Q2 2022 for the same median-priced home. I’d say that that’s a significant increase for a lot of families and a lot of households considering purchasing a home.
As a result, there’s a drop in the percentage of total households that can buy a median-priced home. This matches the data in the graph above. The percentage of households that can buy a median-priced home in Q2 2021 is above 20%. However, in the second quarter of 2022 alone, California’s affordability index was at 16%, the lowest since 2007. This means that only 16% of households in California can afford a median-priced home.
Moreover, California’s affordability index has always been below the national average. The affordability index for the whole country in Q2 2022 was 38%, which is higher than California’s 16%. However, we’re darn close to reaching, at the state level, the levels that led up to the crash in 2007−08. The Bay Area indeed has several different affordability indices per county. However, on average, the affordability index for the Bay Area is consistent with that 16% figure.
Just to reiterate, what we’re seeing is that the number of people who can afford median-priced homes has simply shrunk. This is due to the increase in mortgage rates and home prices not yet coming down in lockstep.
And while we know this all sounds like doom and gloom, do make sure to watch to the end of the video so you can hear what we’re telling our clients who are both on the buy side and the sell side.
Mortgage payments have gone up, and people are feeling squeezed in other areas.
As mentioned earlier, mortgage payments have gone up and have been significantly affecting families. However, this isn’t the only thing affecting families right now. We also see that people are feeling squeezed in other areas. There’s the increase in gas prices, in food prices, etc. Generally speaking, inflation is raising prices across the board. As a result, people are now spending their discretionary income on more of the essentials. People are opting to spend more on things like food and rent, rather than on things like vacations and cars.
Because of inflation, people are no longer able to buy what they used to be able to with the same income. They just don’t have that discretionary income anymore, so people are feeling relatively poorer. This is true even though wages are technically up and when unemployment is very low. Regardless of whether the job market is very strong, relatively speaking, that consumer confidence piece has gone down. People just don’t feel the positive effects of making more money, simply because their money no longer buys as much as it used to.
Thus, what we’re seeing right now is that consumer confidence has trickled down. People are not as confident in making these big purchases, whether it be a car, TV, or house. Notwithstanding, long-term borrowing rates are on average or equity is very high. Consumer confidence really isn’t there currently, not even if the banking systems are in a good place or the unemployment rate is very low.
The flip side to this, though, is that consumers would eventually take themselves out of the market, partly due to the increase in borrowing costs. So, when that time comes, expect home prices to go down.
Price growth has started to decelerate.
Another thing we’ve seen in the current market landscape is that price growth has started to decelerate. However, while it is true that it has started to decelerate, price growth is still positive. Based on the graph above, we’re still seeing very minimal price growth of 2.8% at the beginning of Q3 2022. Also, depending on the price point, the price growth levels off or grows very subtly around 1%–3% quarterly. Nonetheless, this is still significantly lower compared to the 10%–20% price growth per month we’ve seen earlier this year. For us, we think this can be attributed to what’s happening on the supply side, following the law of supply and demand.
The Percentage of Home Sales with a Price Above Asking Price is "Normalizing."
On another note, we see, statewide, that homes still end up selling over their listing prices, as seen below. There are still about 44.4% of the total sales of homes with prices above their asking prices in Q3 2022. This seems more “normal” than that of the 72.8% in April 2022 or that of the 70.7% in June 2021 Although this is still quite high, overall, it felt like more of a healthy slowdown.
Also, if you look at it further, historically speaking at a state level, we’re back to nearly pre-pandemic levels. In other words, the party that was the last two years in the real estate market, where we’ve seen a high percentage of sales sell over their asking prices, is over. On a macro-historical level, we are now experiencing more normal levels than we were in the last two years.
Frankly, though, the last 24 months in the housing market seem to have been an anomaly. If you look at any graph, it appears to be a glitch. It doesn’t matter whether it’s of prices, price appreciation, unit count growth, or any of that kind of thing. Also, more or less, we are now on the backside of that curve. We may be now heading back into what feels like a more average market, at least in the short term. However, what happens in the long term is still yet to be seen.
Buyers have more time through the purchasing process.
That being said, what we’re seeing now is that there’s a little bit more sanity in this whole process. Of course, this is based on our observations and our experience working with buyers and sellers. We no longer see the bidding and over-bidding that we were seeing earlier this spring. People aren’t clamoring to grab homes like we used to see before. Generally speaking, buyers now take or have a little bit more time through this process. They now digest all of the information more slowly if necessary. It’s not to say that they’re getting screaming deals on homes. However, it feels like everything has come back to a more sane level.
We would even venture to say that it feels fair. We say this based on our observations and experiences in the last 90 days. Almost all the buyers that we’ve helped buy a house within that period have gotten very fair deals. We feel that these deals are very fair relative to the comps. Not only are the prices they’re paying fair, but also the terms they’ve negotiated to be included in the contract. You know, terms negotiated with the seller to buy down the rate or to get credit for something. All of these things seem to be back to a more sane level rather than the blind bid, where buyers go 10%–20% over the comps and just cross their fingers that it appraises.
Those days feel like they’re gone, at least for now. Instead, we are now moving back into a market landscape where there are longer days-on-market and fewer bidders. As a result, transactions now have less intense negotiations that are all based on just throwing money at the problem.
Days-on-market have almost doubled.
Speaking of the pace of the market, a lot of what we’re hearing is that people feel like the market has slowed down a lot. Based on the data above from the California Association of Realtors, the average days-on-market in July 2021 is eight days. That’s really very quick. It only takes eight days for a home to go into escrow from the day it hits the market. On the other hand, the average days-on-market in July this year was 14 days. It may not be as fast as July 2021, but it is still considered relatively quick. So, even though it feels like things have slowed down significantly, in reality, it really isn’t that significant.
The average days-on-market in those two years almost doubled, and people might say it’s a significant change. However, that’s only true when you look at the data from a short-term perspective. That’s because when you zoom out and look at the historical data again, you’ll see a different story. The average days-on-market of two weeks in 2022 is still way lower than what we had over the years.
According to the graph, historically, the days-on-market ranged between 20 and 50 days. It even reached as high as 60 days in 2011 and 2012. So, our average this year really is still incredibly fast by state or national standards. However, in general, it is just coming back to that median line. Or, slowing down back to the center, if you will.
The number of listings consistently ticks down.
Here’s the flip side of that, though. For the last four and a half years, we’ve seen the number of listings consistently tick down. This means that housing units or the turnover of existing homes has decreased. Based on the data, in May 2022, we had 23,324 new units listed, lower than the 25,285 in May 2021. That means that we are actually at -7.8% this year compared to last year, in terms of year-to-year percentage. Plus, the number of new listings this year is way lower than the 29,258 in May 2018.
In addition, according to CAR, home sales in the Bay Area in May 2022 dipped by 37.2% compared to May 2021. We’re therefore expecting to see a significantly lower number of units sold this year than in previous years.
Supply is still not sufficient enough to meet the overall market demand
It’s also important to note that the current inventory in the market is still lacking compared to the demand. That’s because even though the buyer pool is starting to shrink, the new listings showing up are also shrinking. That, plus the fact that new construction starts are down, and we’re in this very deep valley. We’ve actually discussed this in other videos of new construction, and that builders are just not building. So, yes, the current supply side isn’t there just yet to meet what is still a fairly reasonable demand. And therefore, we’re still seeing this imbalance in general.
On the ground, what we’re seeing is that the number of offers has dwindled. Instead of getting 10, 15, or 20 offers, homes are now only getting somewhere between zero and five. That’s not to say that there are no longer houses getting 10+ offers. Occasionally, you do run into those houses still. This is especially true when the house is in a great location or it has an ADU. Perhaps if it boasts a great view, or if it happens to be the house of the week. Those sorts of houses are still attracting a lot of attention. However, almost everything else is getting much less attention and much fewer offers. Ultimately, they end up selling for more or less what the comps suggest, with a plus or minus a few percent.
Advice for sellers
So, that leads us to the advice we’re giving buyers and sellers that we’re working with right now. On the seller side, what we’re seeing is that it really pays to be the “House of the Week.”
What that means is that a lot of factors must come together and need to be so dialed in that buyers can’t help but stop whenever they come across a home while browsing for a house to buy. We’re talking about factors such as staging, photography, marketing, pricing, or presentation of the house. These things need to be considered thoroughly to make the house stand out amongst other listings in the market.
Doing this could help potential buyers spend a little bit more time browsing through the photos of the house. Hopefully, this would induce enough interest for buyers to come into the open house and take a look personally.
What we also observe in today’s market is that people are coming back to open houses again.
We all know or felt that the market took some sort of a big breather in June. Gas prices were high at that time, and many people were traveling and/or taking vacations. So, there’s a little bit of an expectation that people aren’t interested in coming to open houses.
However, in today’s market, open houses are a little better attended. We encounter buyers with better questions and more interest in homes. So, it’s definitely good to aim to be the house of the week as it’s a good step towards generating a lot of interest from potential buyers. This, subsequently, would get more people through the door to potentially dig deeper into the property and write an offer.
Pro Tip: When selling a home, the key is to do everything you can to get someone on the table. Even if they start with low offers, you can still make a deal favorable to you through the negotiation process.
We would, in fact, expect you to work on negotiating. We actually prefer it more instead of just having five non-contingent offers that are just jumping over one another. However, that would only be possible if you are able to successfully bring someone to the negotiation table first.
Advice for buyers
As for those people looking to buy a house, this is the opportunity that they’ve been waiting for. This is the first time buyers can negotiate and show up with a slightly lower offer with some decent terms. Now is a good opportunity for buyers to make terms that favor them a little bit. Perhaps, negotiate things that will favor the seller just a little bit, if this cannot be avoided. The current market landscape is really a great opportunity to buy a house and not at an excruciatingly high cost.
“MARRY THE HOUSE, DATE THE RATE.”
Thus, the advice we’re giving is really simple. We talked about interest rates being up at the beginning of this blog, and we all already know that. So, don’t necessarily focus on the interest rate by itself. Instead, focus more on the home. As the saying goes, “marry the house, date the rate.” So, just focus on the home, especially when things seem to point to us going into a recessionary period. Historically speaking, rates come down during recessions. That’s because that’s how they get the gears of the economy going again—by decreasing borrowing rates.
So, if you are willing to be a little bit more strategic, maybe consider a different negotiation. If you want to take advantage of the possibility of borrowing rates going down, talk to your lender. Have a conversation with your agent and talk about having seven-, ten-, or even five-year ARM products. Or, maybe consider having a 2-1 buy-down. Perhaps, try to talk the seller into giving you a credit, which will help lower your interest rates. Just try to do what you can to potentially lower your payment. There are some really wonderful opportunities out there to do that.
Also, another thing to keep in mind is that, right now, jumbo loans generally have better prices than conforming loans. So, this might be a good opportunity for you to get into a jumbo price point instead. Or, potentially even buy down the rate or do something creative there. Doing this could get you into a better house than you would have been able to afford 6–12 months ago.
Pro-Tip: If the right house comes along, don’t let it pass you by. Seize the opportunity and just go for it, especially if that house serves what you need and want.
There are actually a lot of houses just collecting days-on-market in which there’s nothing really wrong with them. They’re just being overlooked by the market, broadly speaking. So, that’s our pro tip for you; just show up, marry the house, and date the rate.
Couple that by looking for a creative financing strategy that will help you get into the house today. Don’t be afraid to take that action so that you can then live in it, start your life, and so forth. Don’t worry about it and just work on that next step when the next chapter of the market change unfolds.
WE hope OUR Bay Area Housing Market Update for Q3 2022, "There's a Slowdown Happening," has helped you.
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