Bay Area Housing Market Forecast

Given the numerous challenges facing the San Francisco Bay Area housing market, some industry watchers are understandably wondering whether the bloom has come off the rose in this beautiful and historic region. Whether due to tech-related companies facing wrenching changes and layoffs, sky-high housing prices fueling a stubborn homeless problem or wondering whether the collapse of a favorite local bank may lead to further contagion among the region’s start-up firms, it’s fair to say the future looks murky. Although this murkiness has led to a bit of a frozen housing market – especially in the city of San Francisco – investors armed with data and patience may find some great opportunities in the months ahead.

While most famously known for and influenced economically by the city and county of San Francisco, as defined by the Census Bureau, the San Francisco-Oakland-Hayward metropolitan statistical area also includes San Mateo County to the south, Marin County to the north and the counties of Alameda and Contra Costa to the east.

Most new housing supply in this MSA is located along the eastern edges of Alameda and Contra Costa counties, in addition to various infill developments throughout the region.

Using information from the U.S. News Housing Market Index, we’ve compiled the data you need for a better understanding of the San Francisco-Oakland-Hayward MSA real estate market in 2023.

How the Bay Area Housing Market Changed in 2022

Because the San Francisco-Oakland-Hayward MSA housing market is so expensive, its ebbs and flows tend to mostly follow the availability of developable land and increases in demand from local employers. In 2022, building permits continued to trend downward, falling from just over 1,200 in January to 807 a year later, a drop of 34%. For the three months ending in January 2023 versus the same months a year earlier, total permits fell 23%.

For single-family detached homes alone, the low availability of buildable land meant total permits trending down throughout 2022. For the three months ending in January 2023, permits for single-family homes fell 47% year-over-year.

As multifamily homes fulfilled more of the demand for housing, their share of total permits continued to rise throughout 2022, peaking at 84% in December 2022, even though the actual number of multifamily permits steadily fell after reaching 917 permits 11 months earlier. Still, from January 2022 versus a year later, multifamily permits fell nearly 30% to 650.

Bay Area Housing Supply and Demand

The supply of housing in the San Francisco-Oakland-Hayward MSA, which had dipped as low as 1.06 months in December 2021 as tracked by Redfin, steadily rose in 2022 as more sellers took advantage of equity gains and listed their homes for sale. Last peaking at 2.9 months in October, the supply of homes for sale dipped below 2.0 months in December as mortgage rates fell by half a percentage point but snapped back to 3.2 months in January 2023 as rates rebounded.

For the month of January 2023 year-over-year, the supply of homes for sale rose by 1.3 months, or an increase of over 35%. While this level of inventory is still below the four to six months of supply typically considered balanced between supply and demand for listings, it nonetheless marks the highest number of months of supply since May 2020, when it totaled 3.6 months. However, it matches the level of supply for the overall U.S., which rose 1.71 months year-over-year, or about 114%.

“If we had steady 7% interest rates, we’d probably have more buyers versus when they continue to go back and forth between 6% and 7%,” says Shabber Jaffer, an agent with Intero Real Estate Services. Jaffer, who also covers Silicon Valley to the south, says those communities, which offered larger lot sizes and less density during the COVID-19 pandemic, have tended to hold their values better than more urban-oriented neighborhoods in the city of San Francisco.

In the rental market, while the San Francisco-Oakland-Hayward MSA's vacancy rate of 5.5% for the fourth quarter of 2022 is slightly higher than the 5% level generally considered to represent rental market equilibrium between supply and demand, it’s still lower than the 5.8% rate reported for the nation. Although the MSA's rental vacancy rate was unchanged year-over-year in January, it has fallen sharply from the 8.7 months of supply reported for April 2021.

Sales activity in the months ahead may also be impacted by rebounding mortgage rates resulting from stubbornly high inflation, especially for the critical service sector which accounts for 80% of the U.S. job market. According to the seasonally adjusted Purchase Index from the Mortgage Bankers Association for the week ending March 10, although purchase applications did rise for the second consecutive week, they were still down 40% year-on-year as rising mortgage rates continue to keep many buyers on the sidelines. However, if the collapse of Silicon Valley Bank and other regional banking institutions prompts the Fed to halt or even reverse its interest rate hikes, that would likely result in lower mortgage rates, which in turn could boost sales activity.

Consumer sentiment as measured by the University of Michigan’s Survey of Consumers rose to 64.9 on a 100-point scale in January but was still down 2.3 points year-over-year. While the sub-index measuring current economic conditions for January was higher at 68.4, the Index of Consumer Expectations was lower at 62.7, suggesting that while the consumer outlook is improving in the short term, respondents are expecting continued inflation and some economic turmoil in the months ahead.

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Foreclosure Trends

With such low unemployment and a significant share of existing homeowners benefiting from the low mortgage rates offered in 2021 and part of 2022, both foreclosures and delinquencies tracked by Black Knight remain at very low levels in California. As of December 2022, just 0.10% of homes in the state were in foreclosure versus 0.37% for the nation. Statewide delinquencies of 1.80% in December were also much lower than the national average of 3.08%.

Median Home Price in the Bay Area

With inventory rising but still tight, the median sales price for a home in January 2023 in the San Francisco-Oakland-Hayward MSA fell nearly 30% from its peak in April 2022 and 9.4% year-over-year to a still-stratospheric $1.28 million. However, according to Jordan Levine, chief economist for the California Association of Realtors, these falling prices are not as simple as some headlines would indicate.

“It’s not like the individual homes are down 30%, it’s more the mix of homes sold,” says Levine. “The median price per square foot is down about half that of the headline median price, plus prices always decline by about 6% between the spring selling season and the dead of winter. Seasonality is important.”

Still, Levine also argues that the "lock-in effect" of most homeowners sitting on mortgage rates well below 6% may mean a softer market ahead due to lack of inventory. “The three Ds of death, divorce and dislocation aren’t going to be as much as a motivator to move,” he says.

For newly built homes, potential buyers could snag a better deal than they might with existing resale units, especially along the eastern fringes of the market area. Greg Paquin, president of The Gregory Group in Folsom, California, which surveys and advises on new home construction, says builders have managed to find the "sweet spot" between offering incentives such as mortgage rate buydowns and price cuts.

“Throwing money at buydowns is not as effective as a price drop or allowances for upgrades and options,” he says. “But it’s a different world for standing inventory in which some builders are getting very aggressive.” Paquin says because a lot of land was bought in pre-COVID times at a relatively low price, builders have more breathing room to offer generous incentives versus the seller of an existing home.

Although home prices did continue to rise in early 2022, they peaked much earlier in the year than did median rental rates from Zillow’s Observed Rent Index. Rents continued to rise through August to $3,176 per month before continuing to fall to $3,069 by January. Consequently, although observed rents in the San Francisco-Oakland-Hayward MSA edged up 0.1% year-over-year during the first month of 2023, they still fell 3.4% from last August. With more multifamily supply on the way – including over 280,000 units under construction in just the West Census region alone in January – it's possible that rents will continue to decline, depending on how many of these units are located in the local market area.

“Our view of the San Francisco multifamily market is that the road to recovery has been rocky and really due to two themes: workers not returning to the office and the recent tech layoffs,” says Yuna Gu, associate director with EquityMultiple, a real estate investing and technology firm. “Leasing velocity has dramatically slowed down as the tech layoffs began. All of this tells a story of low demand and depressed valuations for both multifamily and residential sectors.”

Although the San Francisco-Oakland-Hayward MSA may still be the second-largest in California with a total of 4.6 million households in 2021, according to the American Community Survey, more recently it has been losing population to other parts of California as well as to lower-cost states. Between 2020 and 2021, the Census Bureau showed the MSA losing 117,000 residents, with this outflow expected to continue as long as the state is unable to build enough housing affordable to households earning middle to lower incomes.

While national construction costs for new single-family homes as reported by the Census Bureau's Construction Cost Index have retreated from their November peak of 195.5, they're still up 12% year-over-year to 190.6.

Similarly, while average mortgage rates tracked by FreddieMac's Primary Mortgage Market Survey did retreat from their peak of 6.90% in October to 6.27% in January, as of March 8, the rate for a 30-year fixed rate loan rebounded to 6.73%.

Unemployment Trends in the San Francisco Bay Area

Even with rising tech-related layoffs and a declining population, the San Francisco-Oakland-Hayward MSA continued to enjoy one of the country’s strongest job markets through the end of 2022, with non-farm employment up by over 92,000 year-over-year in December and an unemployment rate of just 2.4% versus 3.5% nationally. Of this 92,000 annual rise in the total number of jobs, 8,300 (9%), were in the construction industry, increasing to just over 172,000 and accounting for a 5% share of all jobs in the market area.

Builder Confidence in Bay Area Improves

Builder confidence on a scale of 0-100 for the West Census Region from the NAHB/Wells Fargo Housing Market Index fell 54 points year-over-year to 37 in February, but is still up from 39 in January, higher than the national level of 42 and the strongest showing since December. Year-over-year through February, national builder confidence in current single-family sales fell 43 points to 46, single-family sales projections over the next six months fell 32 points to 48, and traffic of prospective buyers fell 36 points to 29.

For nonresidential construction activity, the Architecture Billings Index provides another economic indicator with a lead time of approximately 9 to 12 months, with 50 marking the split between increases or decreases in billings. In January, the index for the West Census region rose 3.7 points year-over-year to 51.3 while the national index fell 1.7 points to 49.3, implying that the health of the commercial real estate construction sector in the West is recovering faster than that of the nation.

Bay Area Real Estate Market Predictions

Although the overall job market in the San Francisco-Oakland-Hayward MSA remains strong, tech-related layoffs and the surprisingly quick collapse of a critical banking partner in Silicon Valley Bank could have greater ramifications for the housing market. There’s also the issue of a declining population, although that loss tends to be focused among lower-income households in search of more affordable costs of living. However, if the "bloom is off the rose" in San Francisco and other parts of the MSA, it’s likely to be temporary as the historic City by the Bay and its surrounding communities have long proven to be among the country’s most resilient.

The U.S. News Housing Market Index is forecasting 1,437 single-home permits from February through June in addition to 2,213 permits approved for multifamily homes for the Bay Area. Although permits for single-family homes did fall further than predicted in the final few months of 2022, they rose further than forecast for multifamily units as builders took advantage of the increase in apartment demand. However, permits for single-family homes could rebound if mortgage rates retreat below 7% for a sustained period of time and builders find suitable land on which to build in the more affordable submarkets in the eastern parts of the market area.