East Bay Newsletter - August 2023

 

At the start of 2023, the economic consensus resoundingly predicted an impending recession, which has yet to come, and we’re happy to say that consensus has shifted to moderate economic growth. A “soft landing” — reducing inflation without a recession — seems more likely than ever. The economy is far from perfect, but the effect of largely positive economic news eventually leads to a more positive economic outlook from the average person. Job creation and GDP growth in the first half of 2023 have significantly beat expectations. Inflation is declining rapidly, and consumer confidence is the highest it’s been since February 2022. We can largely attribute the bounce in home prices to consumer perception, but consumer perception isn’t the only factor. Home prices certainly rose as recession worries subsided, even in the face of elevated mortgage rates. Supply, or lack thereof, has been the other major factor in the price rebound. Low, but growing inventory allowed for prices to increase quickly.

 

Housing doesn’t follow an Economics 101 supply-and-demand problem in part because it isn’t a commodity good. Inventory rising from near historic lows actually helps prices because more buyers can find a desirable home. During times of normal seasonality (at least pre-pandemic), inventory, new listings, sales, and prices all increase from January to July and decline from July to January. Any movement away from the hyper-low post-pandemic inventory levels is good for matching buyers with the right home, because buyers like enough selection to find the home they want in their desired location. Price appreciation this year indicates that even though sales are low, buyers are finding the homes they want.

 

During the Fed’s July meeting, board members decided unanimously to raise the federal funds rate for the 11th time since March 2022 to its highest level since 2001. Although headline inflation (Consumer Price Index, or CPI) is down by nearly two-thirds since it hit 9% last June, core inflation, which removes volatile food and energy prices from the inflation calculation, has only declined 15%. A large component to core inflation is shelter. The CPI for shelter is only down 5% from the March 2023 peak. This isn’t exactly surprising, considering how close prices are to their peak. The Fed stated they would take future rate hikes on a meeting-by-meeting basis. However, this was before Fitch downgraded U.S. credit on August 1. At best, the downgrade will have little to no impact on interest rates, but if it does have any effect, it will move rates higher. The average 30-year mortgage rate hit 6.81% at the end of July and 6.90 the first week of August. Based on weekly data ending August 3, we expect the average 30-year mortgage rate to hover between 6.25% and 7.25%.

 

Different regions and individual houses vary from the broad national trends, so we’ve included a Local Lowdown below to provide you with in-depth coverage for your area. In general, higher-priced regions (the West and Northeast) have been hit harder by mortgage rate hikes than less expensive markets (the South and Midwest) because of the absolute dollar cost of the rate hikes and the limited ability to build new homes. As always, we will continue to monitor the housing and economic markets to best guide you in buying or selling your home.

 

 

 

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

 

In the East Bay, the housing market is always experiencing high demand, especially in the spring and early summer months. Increasing demand and low, but rising inventory helped drive the rapid home price appreciation that the East Bay experienced in the first half of the year. Typically, demand begins to decline in July and August, so the consistently low supply may become less of an issue. However, less of an issue doesn’t mean a non-issue. Quality new listings will certainly be sold quickly, while less desirable homes will sit on the market. This isn’t unusual, but it’s more apparent due to current mortgage rates. Potential homebuyers aren’t nearly as willing to pay a premium for a fixer upper as they were in 2020 and 2021.

 

In July, the median single-family home prices were up year to date across North Bay counties. As sales and new listings slow in the second half of the year, home prices typically remain stable or decline at the margins.

 

Single-family home and condo inventory, sales, and new listings rose in the first half of the year, although all remain at depressed levels. Typically, inventory peaks in July or August and declines through December or January. Single-family home and condo inventory seemed to have peaked in June, so we will likely see fewer transactions in the coming months. Currently, inventory is so low relative to demand that any amount of new listings is good for the market. However, new listings were unusually low from January through July 2023, which has directly impacted both inventory and sales. The number of home sales is, in part, a function of the number of active listings and new listings coming to market. Since January 2023, sales jumped 82% while new listings rose 52%, whereas last year, for example, sales rose 34% and new listings increased 58% by July.

 

As tight inventory levels continue, sellers are gaining negotiating power. In January 2023, the average seller received 95% of list price compared to 104% of list in July. Inventory will almost certainly remain historically low for the year, and the market will remain competitive in the third quarter.

 

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). The East Bay market tends to favor sellers, which is reflected in its low MSI. MSI trended lower from January to May 2023 for both single-family homes and condos. Even with the slight increase in MSI in June and July, the market still firmly favors sellers. The sharp drop in MSI occurred due to the higher proportion of sales relative to active listings and less time on the market.