The Big Picture
“. . . the competitiveness in the housing market continues to heat up, as homes are selling faster, and the sales-to-list-price ratio is improving, all the while when the number of homes available for sale continues to tighten. All signs point to a market with solid demand, which should help bolster sales through the homebuying season.” —Jennifer Branchini, President of the California Association of Realtors®
- A brief interest rate reprieve and softer home prices during January boosted California home sales by 17.6% on a monthly basis in February 2023, but sales dipped again by 1.0% in March 2023; home sales ended the quarter down 34.2% from a year ago.
- California’s median home price grew for the first time in seven months in March, increasing 7.6% from February. However, on a year-over-year basis home prices were down for the fifth consecutive month, declining 7.0% from the value recorded last March. This should be expected as home prices were rising more sharply at this time last year than the normal seasonal pattern. The market could see larger year-over-year price drops as it moves through the spring home-buying season.
- Housing inventory in California dropped again as sales increased in response to lower mortgage rates; the 2023 housing market firmly favors sellers for both single family homes and condos.
- If interest rates stabilize or even improve in the next couple of months, home sales should rise during the spring homebuying season, but tight inventory will prevent a rapid rebound.
Has the Housing Market Bottomed Out?
As the housing market continues to change, the question on everyone's mind is what will happen with home prices, which have come down a bit since they peaked last June. The most recent data from CoreLogic indicates that at the national level home prices appear to have bottomed out and are now on the rise again. Selma Hepp, Chief Economist at CoreLogic, reports:
“U.S. home prices rose by 0.8% in February . . . and indicating that prices in most markets have already bottomed out.”
CoreLogic projects a 0.2% increase in home prices month over month for March, and a year-over-year increase of 3.7% for February 2024. In general, home prices have seen annual gains of 4.6% for the past 30 years.
Finally, the latest data from Puslenomics' Home Price Expectation Survey indicates that experts project home prices will rise steadily and return to more normal levels of appreciation after 2023.
The Two Big Issues the Housing Market’s Facing Right Now
The biggest challenge the housing market’s facing is how few homes there are for sale. Mark Fleming, Chief Economist at First American, explains the root causes of today’s low supply:
“Two dynamics are keeping existing-home inventory historically low – rate-locked existing homeowners and the fear of not finding something to buy.”
Let’s break down these two big issues in today’s housing market.
1. Rate-Locked Homeowners
Based on data from Freddie Mac, nearly 85% of homeowners have mortgages at or below 4% and nearly all of them have mortgages at less than 5%. But today, the typical mortgage rate offered to buyers is over 6%. This has created a lock-in effect for many homeowners who are now discouraged from moving by rising borrowing costs. As a result, the forecast for home sales in 2023 is expected to show further slowing from last year’s pace
When so many homeowners are rate locked and reluctant to sell, it’s a challenge for a housing market that needs more inventory. However, experts project mortgage rates will gradually fall this year, and that could mean more people will be willing to move as that happens.
2. The Fear of Not Finding Something To Buy
The other factor holding back potential sellers is the fear of not finding another home to buy if they move. Worrying about where they’ll go has left many on the sidelines as they wait for more homes to come to the market. If you’re on the fence about selling, it’s important to consider all your options. That includes newly built homes, especially right now when builders are offering concessions like mortgage rate buydowns.
Homebuyer Activity Shows Signs of Warming Up for Spring
The spring season appears to be warming up in housing as more and more buyers enter the market. And after rising mortgage rates sidelined so many buyers last year, that’s a good sign for the housing market.
According to the National Association of Realtors (NAR), sales surged 14.5% in February, registering the largest month-over-month increase since July 2020 and reversing a 12-month streak of declining sales. California saw a similar boost in home sales in February that coincided with with a dip in the mortgage interest rate. According to Lawrence Yun, NAR’s chief economist:
"Conscious of changing mortgage rates, home buyers are taking advantage of any rate declines."
A 1% decline in rates has the same impact as an 11% decline in prices, making homes more affordable. While mortgage rates are still volatile, they fell steadily in March, and that’s been good news for hopeful buyers.
We also know buyer activity is trending up from the increase in mortgage applications, which shows how many buyers are applying for mortgages. An increase in mortgage applications means an increase in buyer demand. As Joel Kan, VP and Deputy Chief Economist at the Mortgage Bankers Association (MBA), explains, application activity started ramping up as mortgage rates fell steadily in March:
“Application activity increased as mortgage rates declined . . . recent increases, along with data from other sources showing an uptick in home sales, is a welcome development.”
In fact, we can see how mortgage rates have a direct impact on applications over time. As rates rose dramatically last year, applications fell in response. The recent uptick in mortgage applications, as well as the decline in mortgage rates, is good news for sellers because it means more buyers are actively looking for homes.
The Big Picture Data
Silicon Valley Housing Market
- Home sales surged more than 50% from February to March of this year in response to a drop in mortgage interest rates in February. Within Santa Clara County, sales increased by 97% in the same period, one of the largest month-to-month increases among all California counties. When measured annually, however, home sales are still significantly down from last year.
- Median home prices grew from February to March for the first time in seven months. Santa Clara County and Alameda County both posted increases of more than 10%, whereas San Mateo County experienced a 10.6% decline. Despite the rise in prices, home prices in Silicon Valley are still significantly below their all-time highs.
- Housing supply continues to be a challenge for buyers with inventory dropping to values we haven't seen since last year at this time.
- The median number of days it took to sell a single-family home in the Bay Area dropped precipitously in February and March ending the quarter at 14 days compared to 32 days at the start of 2023.
Low Inventory Continues to Challenge the Market
The housing market has undergone significant changes lately, with mortgage rates rising dramatically last year, affecting many people's ability to buy a home. And after several years of rapid appreciation, home prices peaked last summer, prompting some buyers to hold off in anticipation of a significant price drop. But there’s another factor at play – low inventory. There are just not enough enough homes for sale to meet demand. Typically, inventory tends to grow in Spring, peaking in mid-Summer. Despite this increase, buyer demand in Silicon Valley is high enough that the market could easily accommodate the addition of many more homes before achieving a balance between buyers and sellers. While sales are still below last year’s level, experts predict that sales will climb higher in the second quarter with more homes coming to market as seasonality kicks in. However, sellers are under no pressure to move since they have plenty of equity right now. That equity acts as a cushion for homeowners, lowering the chances of distressed sales like foreclosures and short sales. And with many homeowners locked into low mortgage rates, there is a strong disincentive to moving and financing at a much higher rate. If inventory does not improve significantly, competition among buyers will continue to rise, which could lead to an increase in housing prices.
History shows that there is always strong buyer demand in Silicon Valley and homes tend to hold their value well over the long term. "[T]he market seems to have weathered more aggressive rate hikes and banking failures quite well in the last few weeks,” said C.A.R. Vice President and Chief Economist Jordan Levine. “If interest rates stabilize or even improve in the next couple of months, home sales should rise during the spring home-buying season, but tight inventory will prevent a rapid rebound.”
Unsold Inventory Index indicates continued sellers' market
The Unsold Inventory Index (UII) is a measure of the number of months it would take for all current homes on the market to sell at the current rate of sales. It is a key metric that measures the balance between housing supply and demand within a specific market. A high index value indicates an oversupply of homes, creating a buyer's market with more choices and negotiating power for potential buyers. Conversely, a low index value suggests a scarcity of available properties, resulting in a seller's market with limited choices and potentially higher prices as buyers compete for the available homes.
Housing inventory dropped again as the market saw a surge in sales from February to March. Within Santa Clara County, sales increased by 97% for single-family homes, one of the largest month-to-month increases among all California counties. The Unsold Inventory Index (UII) indicates that Silicon Valley has less than 2-months supply of homes for sale in March 2023. That’s almost exactly what it was a year ago. While the index indicates a strong sellers’ market for both single-family homes and condos, there isn’t the frenzy we saw a couple of years ago
Sales-to-list price ratio rises to 100%
Sales-to-list-price (SL) ratio is an indicator of the negotiation power of home buyers and home sellers under current market conditions. The ratio is calculated by dividing the final sales price of a property by its last list price and is expressed as a percentage. A sales-to-list ratio above 100 percent suggests that the property sold for more than the list price, and a ratio below 100 percent indicates that the price sold below the asking price. The SL ratio rose in March 2023 as sellers are receiving the list price on their homes. This is lower than last year when buyers where bidding up the prices as much as 15-20% in some markets.
Historical
Statistics are from the California Association of Realtors® Housing Market Overview report and reflect existing single-family homes except where indicated. % change is Year-Over-Year.
