March 2023 East Bay Market Report

Market Update

The Big Story

Mixed Signals

Quick Take:

Home sales fell for the 12th month in a row, while, according to the National Association of Realtors, the median sale price continued its seven-month decline from its June 2022 peak. However, data from realtor.com indicate the median price per square foot rose slightly in January and February 2023.
U.S. employment is booming, which largely alleviates our concerns that a full economic recession will occur anytime soon. Yet, consumer confidence is low, and increasing consumer credit card debt and delinquency are early signs of economic instability.
Inflation and mortgage rates are still high, which has massively slowed the housing market, as buyers and sellers are still adjusting to the new market conditions.

Note: You can find the charts & graphs for the Big Story at the end of the following section.

Ins and outs of a housing market slowdown

Banking analysts and economists are raising concerns about the potential for a recession as the Federal Reserve faces a longer road than expected to lower inflation. Over the past year, the Fed has taken measures to combat inflation, including raising its benchmark rate by 4.5% and shrinking its balance sheet by over $600 billion. However, despite these efforts, the Fed may still need to raise its target interest rates to 5.25% by the end of the year to control inflation.

The uncertainty around interest rates has impacted the housing market, especially with regard to mortgage rates. The volatility of mortgage rates has made it more challenging for buyers to obtain financing and afford homes. The spread between the 10-year U.S. Treasury Securities and 30-year mortgage rates has increased, with mortgage rates rising dramatically since early 2021. As a result, the monthly cost to finance a home has increased by a substantial amount over the past year.

The housing market has slowed down significantly due to the rapid increase in costs, with the number of home sales in 2022 remaining low. The number of active listings remains low, but the drop in demand has mitigated this concern somewhat. Despite this slowdown, the economy as a whole is still expanding, with unemployment at a 53-year low and wage growth substantial. While a full recession is unlikely in the near future, potential homebuyers and consumers overall have less buying power than they did in the recent past.

It is important to note that different regions and individual houses vary from the broad national trends, and we have included a Local Lowdown below to provide 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 total dollar cost of the rate hikes.

As always, we will continue to monitor the housing and economic markets to provide guidance for those looking to buy or sell their homes. While the housing market is experiencing a slowdown, buyers can still expect a less competitive market, but must remain decisive as desirable homes are still selling quickly.

Big Story Data

The Local Lowdown

Quick Take:

Home prices rose month over month, signaling that low inventory and seasonality are still affecting pricing despite higher mortgage rates.
Active listings in the East Bay rose slightly in February as fewer listings came to market, but inventory is still near historic lows.
Months of Supply Inventory declined as sales increased and homes sold faster month over month, indicating the market has moved deeper into a sellers’ market.

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

Typical and atypical seasonal trends

During the first half of the year, we typically observe an increase in both inventory and sales in the real estate market. This trend is due to the high number of new listings that come on the market in the first half of the year. However, this year, the number of new listings in January and February has not kept pace with sales, which is an early indication that inventory will struggle to grow this year. Although sales are expected to be more subdued in 2023, the demand for properties in the East Bay is already significantly outpacing supply, even with higher mortgage rates.

The East Bay real estate market has experienced a contraction in prices compared to other markets due to the rapid price growth observed in the first half of last year. For instance, single-family home prices in Alameda grew by 34.5% from January to May 2022 but have since declined by 2.7% over the past two years. Condo prices, on the other hand, have increased by 2.1% over the past 24 months in Alameda and have been less variable. Similarly, single-family home prices in Contra Costa have declined by 6.2%, while condo prices have increased by 13.4% since February 2021.

Despite the current market conditions, people still want to live in the East Bay as homes are relatively affordable, resulting in more market participants. As we enter the spring season, the next few months will provide a clearer picture of how buyers and sellers are responding to the market conditions. However, early signs suggest that there will be increased competition over the limited number of listings in the East Bay.

Inventory near record lows

In the latest real estate market update, it has been observed that there has been a slight increase in the inventory of both single-family homes and condos month over month. This increase is mainly due to new listings that have outpaced sales. However, it is worth noting that the number of new listings that have come to the market is far lower than what is typically expected during this time of the year.

A particularly significant trend in the market is the decrease in new condo listings month over month. This is partly due to the fact that higher interest rates have made it less attractive for potential sellers to enter the market. This is because sellers are usually required to buy a new home as well, and higher interest rates have reduced their incentives to do so.

Many homeowners have either recently purchased or refinanced their homes at historically low rates, which means they are not keen on selling, and this has led to fewer listings coming to the market. On the other hand, potential buyers have been priced out of the market as interest rates have risen. However, as interest rates have been higher for a while now, buyers are more comfortable re-entering desirable markets like the East Bay.

The current market situation is not as hypercompetitive as it was in 2021, and buyers are not facing as much competition as before. However, it is expected that as we move into spring, we will start to see more competition among buyers. New listings have fallen by 40.5% year over year, and sales have declined by 33.7%. Despite this, some inventory growth is still expected in the first half of 2023, but inventory is likely to remain low.

Overall, the real estate market has been impacted by a combination of factors, including higher interest rates, low inventory, and fewer listings. These trends have created a market environment that is less competitive than before, but we are likely to see some changes as we move into the spring season.

Months of Supply Inventory dropped, indicating a sellers’ market

Months of Supply Inventory, commonly known as MSI, is a crucial metric used in the real estate industry to measure the supply and demand relationship for homes. It is calculated by dividing the total number of homes listed on the market by the average number of homes sold per month. Essentially, MSI measures the number of months it would take for all homes currently listed on the market to sell at the current rate of sales.

In California, the long-term average MSI is around three months, which signifies a balanced market where supply and demand are relatively equal. However, an MSI lower than three indicates more buyers than sellers on the market, creating a sellers’ market, while an MSI higher than three suggests more sellers than buyers, creating a buyers’ market.

The East Bay region in California has been experiencing a sellers’ market, as indicated by the MSI. In February, the MSI for both single-family homes and condos dropped even lower due to an increase in home sales and homes selling more quickly. This sharp drop in MSI signifies a stronger sellers’ market in the East Bay region, where demand exceeds supply, resulting in increased competition and higher prices for buyers.

In conclusion, understanding MSI is crucial for both buyers and sellers in the real estate market as it provides insights into the current market conditions and helps to make informed decisions. It is important to keep track of MSI over time as it can indicate changes in market trends and conditions.