Forbes: Recession Continues - Bay Area Housing Market Update - November 2022

In their latest release the Bureau of Economic Analysis announced that Q3 GDP grew at 2.6% rate, better than economists predicted.  This growth number was celebrated in some news sources with title like in New York Times “U.S. Economy Returned to Growth in Third Quarter”.  Others were more cautious with their titles.  Business Insider posted an article with a headline reading “The US economy came back to life this summer, but things are still likely to suck next year”.  Forbes, on another hand was outright pessimistic publishing this opinion: “Why Q3 GDP print doesn't mean recession avoidance.”

Quoting from the article: “The only saving grace of GDP report was its headline plus 2.6%.  As it turns out, net exports added 2.8 percentage points, and for the wrong reason. Excluding net export, the domestic economy GDP growth was -0.2%. The recession continues.”

Indeed, what we see here in the Bay Area is that housing market is slipping deeper into a recession.  For the first time since the 2019 year-over-year median home sale price in Santa Clara and San Mateo counties declined.  October median home sale price dropped by 1.7% compared with the same time of last year.  And there are other indicators of the slowing housing market.

October sales dropped by whooping 45% year-over-year and number of new contracts, a leading indicator of market activity fell by 47%.  And while the number of new listings, the number of homes coming to the market, also declined, the number of homes available for sale increased by 27% because homes are coming to the market faster than they sell.  The market, however, is still a seller’s market.  The inventory increased to 2 months from less than one month of inventory a year ago, but it was not enough to put buyers in the driver’s seat. 3 to 6 months of inventory is considered a balanced market.

This sharp drop of the market activity was triggered by the skyrocketing interest rates.  If you remember, interest rates were hovering around 3.25% at the beginning of the year.  By the end of October rates more than doubled to close to 7%.  Due to the aggressive Feds inflation fighting moves, it was the fastest rate increase on record and stunned everyone.  Both the buyer and the sellers are affected.

Most obviously the growing interest rates affected home affordability for the buyers.  Assuming you are buying a median-priced home in the Bay Area, roughly $1.5M in Santa Clara and San Mateo Counties.  With 20% downpayment, your loan will be $1.2M.  At the beginning of the year your monthly payment would have been $5500.  But if you are buying this fall, your payment will be $2700 higher, around $8200.  The increase of the monthly payments will be partially compensated by the declining property prices.  Home prices fell by 14% in October compared with April of this year.  April was the peak month from the home prices point of view in our area.  If you are a buyer looking for a new home, talk to your lender to get a custom monthly payment quote and ask them about interest buy-down programs that may help you reduce your borrowing costs.

Keep in mind that this home price drop will also be reflected in a smaller property tax bill reducing your overall cost of home ownership.  Thanks to Prop 13 these savings will persist for as long as you own your home.

Another side effect of the ballooning interest rates is that fewer homes will be coming up for sale.  Most of the current homeowners were able to purchase or refinance their homes at rock-bottom interest rates.  For them, moving to a new home means that they have to get a new loan at much higher interest than their current mortgage.  This will discourage discretionary sales when people move up to a bigger home, downsize or just relocate closer to work.

If you are a seller, it is critical more than ever to prepare your home for sale and price it right.  Homes get most attention when they just come to the market, the first weekend.  That is when most active buyers will notice your home and come over to see it.  Understanding the market expectations will allow your home to attract the best buyers and sell fast at the highest possible price.  Homes are still selling fast – median time on the market was only 14 days in October.