Experts predict what’s next for the Bay Area housing market

It’s been a wild year for Bay Area real estate — and not in the way we’ve become accustomed to. After a hotter than hotter 2021, 2022 started with a bang, only to cool off dramatically in the second half of the year. As interest rates rose, stock markets softened, and layoffs ramped up, the Bay Area housing market began to contract for the first time in years. One report even said that the Bay Area metro is no longer the least affordable housing market in the US. The rental market also remained fairly stable, remaining below pre-pandemic levels and showing no signs of recovering the title of the most expensive market in the US.

Forecasts are just that, and if last year’s forecasts taught us anything, it’s that markets can change dramatically, even within a year. We spoke to Bay Area economists, realtors and data analysts to better understand what they think will happen in the housing market in 2023.

It’s finally a buyer’s market, maybe

Bay area buyers have years of fierce competition, excessive outbidding, and the need to forego contingencies when it comes to writing an offer. Finally the tide can turn. “There is more choice and less competition than there has been in many years, which means more opportunity for buyers,” said Compass Chief Market Analyst Patrick Carlisle. “Pay less attention to, or even ignore, what sellers ask for and make offers at the price you want to pay. Some beautiful homes, luxury and ultra-luxury homes and apartments are being sold at deep discounts from the asking price. A buyer who can close the deal currently has the balance of power.”

Even with higher interest rates adding to the cost of a mortgage, overall home prices can be lower. In a recent survey of realtors from real estate tech company HomeLight, only 30% of respondents said their market was a seller’s market in the fourth quarter of 2022. This is a rapid drop from the 95% of real estate agents who said they were in a seller’s market in the second quarter of 2022.

“That pressure [buyers] felt in 2021 that ‘have to buy yesterday’ is over,” said East Bay broker Anna Bellomo. “They can now start the process a little more calmly and centered. I think that’s a good thing.”

Affordability is another challenge

No one knows what will happen to interest rates in the coming year, but many experts agree that they don’t expect them to rise significantly, if at all. Unfortunately for the Bay Area, an interest rate around 7% can add thousands more to a mortgage that a buyer might have anticipated last year.

“As we look to next year, we see the cost of borrowing remain high,” said Senior Economist George Ratiu. “We see affordability as an overall challenge for the housing market.”

Especially in a highly underdeveloped housing market like the Bay Area, Ratiu said, the lack of inventory is still a problem. He warns that it won’t be resolved any time soon.

“There are reasons to be optimistic about supply and price nationally and less reason to be optimistic about that stuff in San Francisco,” said Rob Warnock, research associate at Apartment List. “For a city and region notorious for undersupplying housing, we don’t have as robust a pipeline of new homes coming online in five to 10 years as we do in the rest of the country.”

That means homebuyers, especially first-time buyers, may still be priced out. “Because prices have reached such high levels, low mortgage rates have been the saving grace that enabled people to buy a home in the region,” said Matt Kreamer, data spokesperson for Zillow. “Therefore, when mortgage rates rise significantly, demand and price growth fall more in the Bay Area than anywhere else in the country.”

Condos are still the best deal out there

Prices for condominiums in downtown San Francisco have never really recovered from the pandemic, and recent data paints a surprising picture of the current market. As businesses in SoMa and the financial district close or relocate, tech layoffs continue and interest rates remain high, the condo market has fallen to 2017 prices. There will likely be even less competition in this market as well: Condos stood for an average of 65 days on the market in downtown San Francisco neighborhoods more than double what the home market saw between September and November 2022, according to Compass. San Francisco’s condominium inventory is also more than double that of the city’s home market, with 5.6 months of inventory on the market.

But the number that best indicates how good a condo deal could be right now is the percentage of homes selling above asking price. Only 19% of apartments sold for more than asking price from September to November, while 63% of San Francisco homes were outbid.

“It is an excellent time for buyers to aggressively negotiate home purchases at prices well below those of recent years. This is probably especially true for the condo market. … There are deals to be made here for buyers with the financial resources and a long-term vision,” said Carlisle.

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