Will SF Bay Area Housing Prices Drop?

Posted On: September 14, 2022
By: Matt Fuller

Everyone has been asking me what’s up with the market, will SF and bay area housing prices drop? While I have no crystal ball, this is what I know: Real estate is exceptional (unlike other goods), and real estate stats eventually reduce to the three basics of  how many, how much, and how long:

How Many, How Much, How Long?

In SF, the number of sales are down between 15 – 25% depending on property type. So the “how many” is way down. You may have read a few thousand articles about that. So yes, our volume of sales have definitely dropped. But volume does not equal price!

In SF, prices are basically unchanged. Depending on how you measure it prices are trading in a range that is within 1-2% of their sales price last year to date. So “how much” is stable, unchanged, plateau. So far, San Francisco housing prices aren’t dropping, and we will examine why in detail momentarily.

In SF, days on market are unchanged or slightly less than in 2021, depending on property type. And “how long” is unchanged or slightly quicker sales in 2022.

How do fewer sales happen at the same pace while prices remain stable?

The answer is: rent.

Sales are down because fewer homes are selling, but the answer to the question of ‘Will bay area and san francisco housing prices drop?’ is no  because seller’s can rent their house at a profit instead of sell at a price that is lower than they want. If excess capacity existed in the rental market, soft or lower rent prices would force more sales at lower prices. People generally will take a clean cut to move on instead of a slow on-going bleed. But the rental market doesn’t have excess capacity and interest rate increases increase rental demand.

Housing Market is not the Stock Market

People don’t have to own stocks. Everyone tells you that you should, but they aren’t a human right nor required. They are an optional luxury good of sorts.

People have to live somewhere. They can own a home. They can rent a home. They can be homeless. But every human alive lives somewhere. While housing can be a luxury good, all housing is utilitarian before anything else.

Stocks are a luxury good that exist on paper and the quantity of stock available can be easily changed. Houses are utilitarian, required by everyone and they take years to create.

California is not America

Building housing in California’s almost-endless planning and appeals process means it takes longer and costs more to build here than pretty much anywhere else. Stock can be made by lawyers with some paperwork. Housing takes a lot longer to come on line.

SF is not California

As bad as California is, SF is worse and throws in discretionary review and conditional use authorizations along with every other appeal. Housing takes even longer to come on line in SF than CA which is longer than the USA.

But Interest Rates and Doom

Doesn’t matter. You have to live somewhere. If interest rates push you out of the purchase market and into the rental market, suddenly demand in the rental market is very very strong and rent prices are up, thus solving the seller’s problem.

Sales are down because fewer homes are selling. Housing prices are stable because seller’s can rent their house at a profit instead of selling at a price lower than their expectations. If excess capacity existed in the rental market, lower rental prices would force more sales at lower prices. People generally prefer the certainty of a loss today to the uncertainty of a continuing monthly loss of unknown duration. The 2022 rental market doesn’t have excess capacity, and interest rate increases have increased demand for rental homes.

Sale or no sale, seller’s get their number

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