State of the Bay Area Real Estate 2023
Since 2021, the Bay Area real estate market has been characterized by high demand and low inventory, resulting in rapidly increasing prices for both homes and rental properties all across the region. Fueled by strong job growth in the tech industry, low interest rates, and limited housing supply due to zoning restrictions and the high cost of construction, the prices of homes all across the bay area reached an all time high by the end of 2022. However, money printing by the Fed in the wake of the COVID-19 Pandemic stimulated a price growth that needed to be reigned in during 2022. Rapidly escalating interest rates has affected the housing market in ways that have been very different from past recessions.
The questions on everyone’s minds who are focused on the real estate markets are: what happens now with the Federal Reserve and mortgage loans? Will 2023 bring around another collapse of residential real estate? How can I take advantage of the current economic situation in order to purchase or sell real estate?
The answer to the first question is not necessarily clear since the Federal Reserve’s main function is to ensure that the economy is healthy. To do this, prices in the economy need to remain stable or grow by a small amount, usually 1-2% on a year by year basis. Yet, the COVID-19 pandemic brought that strategy screeching to a halt by impacting workers, and production lines. All throughout 2021 and even into 2022, complaints about the Fed’s actions have focused on a couple of themes; the Fed didn’t act quickly enough to reign in inflation and correct pricing in the economy. Additionally, the Fed is not acting aggressively enough now even with a series of rate increases, and it should have been better at seeing the current crisis coming. The rate increases in 2022 have been a knee jerk reaction to a Federal Reserve that viewed inflationary pressures as purely transitory and it didn’t take into account how so much money in the economy would translate into over-purchasing and leveraging. The result is that we’re starting 2023 with the highest interest rates since October of 2005.
The result of this period of high interest rates is that mortgage application activity has shrunk to a record low this week as high mortgage rates continue to weaken the housing market. This high rate environment means that purchasers of real estate are less willing to pay for properties with high costs as this will likely cost them more in interest payments. However, Freddie Mac thinks that because inflationary pressures continue in the economy, despite the high Federal Reserve rates, there could be lower mortgage rates as 2023 continues. Let’s hope that future FOMC meetings and the release of economic data is in line with a reduction of inflation in 2023 so that we can see lower mortgage rates.
Higher interest rates have no doubt hampered prices in Real Estate. With buyers staying on the sidelines due to high interest rate costs, it’s no surprise that inventory is staying longer on the market and home prices have been lowered in order to sell at a more attractive price. Additionally, California is still one the most expensive housing ecosystems in the country — a situation that had only gotten worse as rising mortgage rates weighed on wallets and buyers' purchasing power through much of 2022.
According to data from the California Association of Realtors, the state's median home price was $829,760 for the period, a steep 48% increase over the typical US home price of $398,500. In other words, with the state's median income for a 4-person household being $98,644, only 18% of households in the state could afford the cost of a typical California home. In order to close on a home purchase in California, the CAR says that the typical buyer would need to earn a minimum annual income of $192,800 and make a monthly payment of $4,820 — which includes principal, interest and taxes on a 30-year fixed-rate mortgage with a 5.72% interest rate.
Despite the challenges of a competitive market, there are still opportunities for buyers and investors throughout the Bay Area. For example, some neighborhoods in Oakland and other cities may offer more affordable housing options, while others may provide opportunities for value-add investments.
As with any real estate market, it is important to approach the Alameda County market with a solid understanding of local trends and conditions, and to work with experienced professionals who can provide guidance and support throughout the buying or investing process. Get in contact with us today!
