Banking analysts and economists are starting to cry recession again, as the Fed is faced with a longer road than anticipated to lower inflation. Over the past year, the Fed has raised its benchmark rate by 4.5% and shrunk its balance sheet by over $600 billion. At a minimum, we expect the Fed to raise its target interest rates to 5.25% by the end of the year, which will only happen if they continue to raise rates by 0.25% over the next three quarters. There is a very real chance that rates will move higher than 5.25% because the Fed has such limited tools to combat inflation. The economy is still in the early days of disinflation — a temporary slowing of the pace of price inflation — and the Fed has indicated that they’ll keep rates high until inflation is under control. This uncertainty around interest rates has hit the housing market especially hard.
Mortgage rates have been volatile, making it more challenging for buyers in terms of financing and affordability. Historically, the spread between the 10-year U.S. Treasury Securities and 30-year mortgage rates has been around 1.8%. Currently, 10-year treasuries are yielding 4.08%, while the average 30-year mortgage rate is 6.65%, a spread of 2.57%. Buyers and sellers are still getting used to the dramatic mortgage rate hikes that started in early 2021. Even looking back one year, the price difference is substantial. When we account for the 5% year-over-year increase in median price per square foot of a home in the United States, plus interest rates rising over 2.5%, the monthly cost to finance a home rose by 41%. Looking back two years, the monthly cost has risen by 81%.
The housing market has done what you’d expect of any market when cost rises so rapidly: It slowed down substantially. The number of home sales in 2022 was exceptionally low, and we expect sales to remain low in 2023, since mortgage rates will likely stay between 6 and 7% on average for the rest of the year. Additionally, the number of active listings remains historically low but isn’t as large of a concern as it was in 2020 and 2021 due to the large drop in demand.
We do want to be clear that the housing market isn’t in a recession, nor is the rest of the country. Still, potential homebuyers, and consumers overall, have far less buying power than they did in the very recent past. The broad economy is still expanding, the unemployment rate is at a 53-year low, and wage growth has been substantial, making a full recession unlikely in the near future. Homebuyers can expect a less competitive market but must continue to be decisive, as desirable homes are still selling quickly.
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 of your area. In general, higher-priced regions have been hit harder by mortgage rate hikes than less expensive markets due to the absolute dollar cost of the rate hikes. As always, we will continue to monitor the housing and economic markets to best guide you in buying or selling your home.
Big Story Data
The Local Lowdown: Typical and atypical seasonal trends
Active listings in San Francisco dropped further in February as fewer listings came to market, causing inventory to reach a two-year low for the third month in a row.
Home prices rose month over month, signaling that low inventory and seasonality are still affecting pricing despite higher mortgage rates.
Months of Supply Inventory declined as sales increased and homes sold faster month over month, indicating the market may shift to a sellers’ market in the spring if significantly more new listings don’t come to market.
Note: You can find the charts/graphs for the Local Lowdown at the end of this section.
Typical and atypical seasonal trends
This time of year, we usually see both inventory and sales increasing steadily through mid-summer. Inventory is able to grow, even with rising sales, because of the relatively high number of new listings that typically come to market in the first half of the year. However, the number of new listings decreased from January to February, which is an early sign that inventory will struggle to grow this year. Although we expect sales to be more muted this year, demand could start to outpace supply, especially if sales continue to rise without being met by more new listings. For now, rising mortgage rates have dampened demand enough that supply isn’t an issue. Higher mortgage rates tend to hit more expensive markets much harder than less expensive markets, unless a significant amount of the property is paid for in cash, due to the absolute dollar cost of financing. For example, a $500,000 30-year mortgage at 6.5% is much more affordable ($3,160 per month) for many more potential buyers than a $1 million mortgage at 6.5% ($6,321 per month).
As one of the most expensive markets in the country, San Francisco real estate prices have been hit harder than other markets. Single-family home prices have declined 10.6% over the past two years after declining 28.9% from the March 2022 peak. Condo prices have only declined 13% from the April 2022 peak, which brought prices to the same level as February 2021. The next three months will give us a clearer picture of how buyers and sellers are reacting to the current market conditions, but early signs point to more competition over the limited number of listings in San Francisco as we enter the spring season.
Inventory hits two-year low
Single-family home inventory rose slightly month over month, as new listings outpaced sales. Condo inventory fell further as sales increased and new listings decreased. Higher interest rates have dropped incentives for potential sellers to enter the market, since sellers usually also must buy a new home. Homeowners either bought or refinanced recently, locking in a historically low rate, which means they aren’t selling and fewer listings are coming to market. Moreover, many potential buyers were priced out of the market as interest rates rose; however, interest rates have been higher for enough time that buyers are more comfortable re-entering desirable markets like San Francisco. Currently, buyers aren’t facing anything similar to the hypercompetitive 2021 market, but we will likely start to see a more competitive market in the spring. New listings fell by 60.9% year over year, while sales declined 45.8%. We still expect some inventory growth in the first half of 2023, but inventory will likely remain low.
Months of Supply Inventory implies a balanced market for single-family homes and a buyers’ market for condos
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). MSI dropped in February for both single-family homes and condos, indicating the market is starting to get more competitive. The sharp drop in MSI occurred due to homes selling more quickly and fewer new listings coming to market. Currently, MSI implies a balanced market for single-family homes and a buyers’ market for condos.