September '23 Market Update
Before winter's chill, the Residential Real Estate (RRE)
sector within the Bay Area appears uncertain, struggling to ascertain its
direction. Various macro and microeconomic variables exert divergent forces
upon the RRE market. Whether attributed to the absence of available Inventory,
with sellers seemingly constrained by the enticing allure of historically low interest rates or the reluctance of prospective buyers stemming from the diminished
affordability arising from elevated interest rates and the apparent reluctance
of home prices to exhibit significant fluctuations following the notable surge
experienced over the two years after the onset of the COVID-19 pandemic. The
Federal Reserve, for its part, does not indicate an imminent reduction in
interest rates but rather alludes to the possibility of future rate hikes. There
exists a need for a decisive shift to invigorate the real estate market. The
outcome of this standoff remains uncertain, and while one may only speculate,
if one were to place faith in mathematical principles and subscribe to the
concept of regression to the mean, it is plausible to anticipate that the
remarkable appreciation of over 40% within the two years following the COVID-19
pandemic will inevitably necessitate a correction, rather than a steep crash.
It is foreseeable that a considerable period will be required for inventory
levels to normalize, for pricing adjustments to materialize, and for enhanced
affordability to emerge gradually. An examination of pertinent data is
warranted better to comprehend the present impasse between supply and demand
dynamics.
Figure 1: Existing Home Sales Decline
Home sales (number of transactions) have reduced over the
year by a whopping 18.3% Year-To-Year.
Figure 2: Inventory of Homes Decline
Inventory of Homes Decline by 23.5% Year-To-Year in the Bay Area
Figure 3: Median Sale Price Increase
With a substantial dip in Inventory, the prices continue to
hold, with a 5% increase Year over Year and almost stable Month over Month (July
2023 to August 2023).
Figure 4: Monthly MortagagePayment
With the increase in interest rates over the last year, even
though the prices have come down compared to the peak in March/April 2022, the
monthly mortgage payment has substantially increased.
Figure 5: Home Affordability Index
The Home Affordability Index quantified the proportion of households capable of purchasing a median-priced dwelling, which has regrettably dwindled to a meager 19%. This starkly contrasts the situation observed in Q1-2012 during the aftermath of the 2008-2012 economic downturn when a considerably more substantial 45% of households had the financial means to acquire a residence at the median price point. The challenges confronting prospective homebuyers primarily revolve around the issues of affordability and the persistent shortage of Inventory. The resolution of this problem hinges upon a singular trajectory: the augmentation of housing inventory. This, in turn, necessitates a catalyst, which could manifest in either an unforeseen economic upheaval or the establishment of an appealing interest rate threshold that motivates homeowners to consider listing their properties for sale. Speculation abounds regarding the forthcoming events and invites contemplation on the subject. We welcome your insightful perspectives and encourage you to share your thoughts in the comments below.
