January 25, 2022
Note: You can find the charts & graphs for the Big Story at the end of the following section.
The driving force behind the substantial price increases over the past two years has been the supply of homes, or lack thereof. So, will the housing shortage reverse? The answer is no, as there is no reasonable scenario that would bring active listings to pre-pandemic norms. Before February 2020, seasonal inventory typically peaked in the summer months, but it was trending slightly lower each year. In 2016, inventory peaked at 1.55 million active listings, and by 2019, the peak fell to 1.35 million homes. Inventory in 2021 reached its highest point at approximately 621,000, a 54% decline over two years. Homebuilders simply cannot build fast enough, especially in sought-after urban areas that have already been developed, and new listings are peaking far lower than the historical seasonal norms.
At the same time, we are on pace to see around a million more homes sold in 2021 than in a typical year, based on the long-term average. In other words, more homes are selling, despite the historically low inventory, which is further driving down inventory. In 2022, we expect demand to remain elevated and supply depressed, which should keep home prices from depreciating.
Price appreciation likely will not see the record gains we experienced over the past two years, which is actually good. If we learned one thing from the mid-2000s, we know that we don’t want another housing bubble. The deceleration in price increases, therefore, actually benefits the current market. From a practical standpoint, home prices rising at 20% per year is unsustainable and would certainly cause a major collapse. Moving through 2022, we expect year-over-year price increases to move back to historical norms, in the 5–10% range.
Fed rate hikes in 2022 could drastically affect appreciation as well, which, again, isn’t a bad thing. The low-cost financing we’ve seen over the past two years could be coming to an end (although it’s difficult not to take a believe-it-when-I-see-it-approach to rate increases). When we account for current inflation, which is the highest it’s been since 1981, the real rate of borrowing is negative if you borrow at a rate below 6.8%. Simply put, you’re getting paid to borrow! We don’t expect this phenomenon to last long — it’s a fairly unique situation.
The market remains competitive for buyers, but conditions are making it an exceptional time for homeowners to sell. Low inventory means sellers will receive multiple offers with fewer concessions. Because sellers are often selling one home and buying another, it’s essential that sellers work with the right agent to ensure the transition goes smoothly.
|A hot market ahead|
Note: You can find the charts/graphs for the Local Lowdown at the end of this section.
After single-family home prices appreciated significantly in the first half of 2021, it made sense that we would see a correction in the third and fourth quarters. However, a decrease in prices in the short term has given more room for price appreciation in 2022. With high sales relative to the available inventory, we anticipate a competitive market in the year ahead.
In December, condo prices declined slightly from the all-time high reached in November, which was the first price peak for condos in over a year. The pandemic hit demand for condos hard, but price and sales indicate that demand is back, and we will likely see more price appreciation in 2022.
Despite the slight increase in single-family home and condo inventory in 2021, sustained high demand in the last quarter of the year and a lack of new listings brought single-family home supply to historic lows. Once again, we are seeing that far more people want to live in San Francisco than want to leave. Condo inventory finally reached pre-pandemic levels after an inventory boom in the second half of 2020. In 2021, condo prices rose considerably as inventory declined. Even though we’ve seeing some price correction for single-family homes after the first half of the year, the sustained low inventory will lift prices. Sales in San Francisco have been incredibly high, again highlighting demand in the area.
Days on Market is rising, but this is more a function of seasonality than a lack of demand for homes. Buyers must put in competitive offers, which, on average, are 6% above the list price for single-family homes and 5% above for condos.
Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes for sale on the market to sell at the current rate of sales. The average MSI is 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). Currently, single-family home and condo MSIs are both extremely low, indicating a strong sellers’ market.
Stay up to date on the latest real estate trends.
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