What’s Happening to the Housing Market in 2023?

So the questions I'm getting asked every single day by buyers, sellers, investors, um, in the Bay Area is, you know, what, what's going to happen with the real estate market in 2023? Did the market crash in 2022? What's happening with interest rates? Is the market going to crash into 2023? What if we go into a recession? Is it a good time to buy? Is it a good time to sell? Um, I'm gonna break all that down for you in this video. What's up everyone? My name's Austin Klar. I'm a lawyer turned real estate agent and real estate developer in San Francisco. I've lived in multiple neighborhoods throughout the city since moving here in 2013, which gives me in-depth firsthand knowledge of what it's like to work and live in San Francisco. And every single day I put my courtroom advocacy and contract negotiation skills to work for people trying to buy, sell, and invest in real estate every single day. If you wanna know more about the real estate market in San Francisco, or you wanna look at any properties or get more information about particular communities, definitely reach out to me. My contact information is in the description below. I will personally answer every call, every email, every text. So, you know, please reach out. I'd be more than happy to help you. And if you want more videos just like this, make sure to subscribe to my channel. I'll be posting videos like this every single week. So make sure to click the bell so you're alerted every single time I post. 2022 was perhaps one of the most, if not the most tumultuous years in real estate. And 2022 started pretty much where 2021 left off. Mortgage interest rates were at historic lows. You had properties getting into contract at way over ask with, you know, a dozen, two dozen offers, you know, within a week of being listed. The pace of sales was so frenetic. The competition was insane. But all that changed, you know, a few months into 2022 when mortgage interest rates started to rise. We've never before in the history of this country seen mortgage rates double within the span of one year, and they actually doubled in less than a year, in about 6 or 7 months in 2022. And that really changed the way that buyers buyers and sellers were looking at their decisions whether to buy or sell a house. It put— it had a huge impact on affordability. People who were, you know, pre-approved for a $4 million loan, when interest rates doubled, now they found out that they're only approved for a $3 million loan because, you know, their monthly payments are higher. And as those borrowing costs continue to increase, home sales and home prices really slowed down. So the frenetic you know, all-time high, you know, pace of growth that you saw in 2021 heading into 2022 really started slowing down. So in this video, I'm going to break down for you what really happened with home prices and home buying and selling activity in 2022 compared to 2021 and the few years prior to that to show you that there wasn't really a crash. In 2022, home prices did reach a peak and they did, at least in San Francisco, come down from that peak within 2022. But I'm going to show you the data to show you that compared to years prior, the housing market is still very healthy. It did not crash in 2022. And then I'm going to break down for you why I don't think the housing market is going to crash in 2023, and what might happen with home prices if we get into a recession, and what I think is going to happen with mortgage interest rates. So first, I want to start by breaking down what happened in 2022 and how it compares to prior years to show you where things stand right now. I'm pulling up a chart here that talks about different statistics in 2022 compared to the years 2018, '19, '20, and '21. Uh, and what you see here for new listings, there were 8,223 new listings in 2022, and that's down 11% from 2021, which had 9,244 new listings. But if you look at that number compared to 2020, 2019, and 2018, it's pretty much on par. Yeah. With those years. So the activity that you saw with new homes coming to market, uh, was it as high as, you know, the all-time record high of 2020 and 2021? No. But was it still very healthy compared to 2018 and 2019, which by the way were, you know, considered some of the best years in real estate heading into the pandemic? Um, and the answer is they were not only in line, there was actually more activity in 2022 compared to 2018 and 2019, and it was only slightly under what there was in 2020. And the story is similar with pending sales. There were 5,569 pending sales in 2022. Not as great or as robust as the record high of 2021, but pretty much on par with all the years prior, which are considered very, very good years in real estate. The same thing happened with sold listings. There were 5,600 sold listings in 2022, which yes, was down 26.5% from 2021. But look how it compares to '18, '19, 2020. It's pretty much on par with those. So the level of activity that we saw in 2022, when you compare it to 2021, yes, it was down significantly from 2021. But you need to remember that 2021 was an absolute aberration, a totally bonkers year in real estate that we had never ever seen before, and we might not ever see again. And that was caused by historically low borrowing rates. Um, to borrow money was practically free. And so that's why you had so many people clamoring at the gates to get their hands on a home during that time. So that's what happened with housing activity in 2022 compared to the prior years. What about prices? So if you look at this chart here, this shows median sale prices of homes in 2022 compared to prior years. And you can actually see that even with the shift that happened, you know, starting in the, you know, early to middle of 2022, median home prices for homes in San Francisco were up compared to 2021 and every year prior to that. It was $1.45 million in 2022, up almost 1% from 2021 and up, you know, several percentage points from what it was in 2020, $1.38 million, 2019, $1.35 million, and $1.33 million in 2018. So again, higher than the median sale price was in years that were considered very good real estate markets. Mm-hmm. Same story with the average price. The average price of homes in San Francisco by the end of 2022 was $1.7 million. It's down a little bit more than 1% from the peak of 2021, which is $1.76 million, but it was up compared to 2020, 2019, and 2018. So did the market crash in 2022? No. Now I want to shift gears to what's going to happen in 2023? Are we going to get a real estate crash, you know, akin to what we saw in 2008? If we do get into a recession, like there's a lot of talk about right now, what's going to happen with housing? And what's going to happen with mortgage rates? Is it a good time to buy right now? Is it a good time to sell right now? Or should I be waiting on the sidelines until things kind of settle a little bit? I'm going to answer all those next. There are 3 main reasons why today is nothing like 2008 and why you shouldn't expect the real estate market, especially in the Bay Area, to completely crash. Reason number One is the supply and demand dynamics are completely different today than they were back then. One of the most fundamental economic underliers of the housing market is supply and demand. How many homes are there available versus how many buyers are out there and how quickly are homes selling? So back in 2008, there were too many homes on the market compared to the demand that existed at that time. Uh, when the housing market crashed, there was almost 11 months of housing supply. So what does that mean? That means that if no new listings came on the market today, it would it would take 11 months to sell out of all the listings that were available, uh, before the new listings stopped. Um, we're in a very different position today. Today, nationally, there's only about 3.3 months of supply. You need to be in about a 6 to 8 month supply to be in a buyer's market. So we are still very much in a seller's market. And the supply picture in San Francisco is even more constrained than what we see nationally. In San Francisco, single-family homes right now, there's only 0.9 months of supply. So that means if no new single-family homes came on the market, all the existing inventory would be gone in less than 1 month. And that compares to 0.8 months of supply in the super frenetic time of 2021. So yes, there has been an increase in, uh, the supply of housing because there's been less overall activity, but less than 1 month supply of, of housing is pretty much as much as you can get into seller's market territory. Condos, it's a similar story. There's, uh, 1.7 months of supply as of the end of 2022 compared to 1.8 months supply on average in 2021. So the supply of condos in San Francisco from a month's supply standpoint is actually down now compared to what it was at the peak in, you know, 2021. So why is there such a shortage of housing? Well, you know, there's not that much land here available to build housing, and building housing here is very expensive. Over the past year, the number of homes that are under construction has decreased, and the price of constructing homes, you know, went through the roof. The price of wood, the price of steel, the price of labor. So a lot of builders put their plans on pause. So there isn't a huge influx of new housing inventory that's about to come and satisfy, you know, all the people who are still trying to buy houses. There's a strong population of people here who are interested in buying housing, and that's mainly millennials. Millennials made up, you know, approximately 40% of the number of the people who were buying homes, you know, in recent years. And that's because millennials today are reaching their prime home buying age, which is, you know, late 20s to late 30s, maybe early 40s. So as things sit today, there just isn't enough inventory on the market, even with the recent slowdown and even with the recent uptick in inventory to satisfy the demand that is still very much out there. And I expect demand for housing to increase going forward. So remember, one of the, you know, the key drivers of the slowdown that we saw in 2022 compared 2021 was an increase in mortgage rates, which was creating strain on people's affordability. But as interest rates go down, you should expect more people to be able to afford houses and then reenter the market. They put their decision to buy or sell on pause while the, while the interest rate situation sorted itself out. But interest rates over the past several months are trending down, you know, down over 1.5% from their peak late last year. and it's going to continue to go down, assuming that the trends that we've been seeing with inflation continue as we expect. And that's because mortgage interest rates tend to flow with inflation. And based on the last several readings that we've received from the Federal Reserve about the Consumer Price Index, inflation, you know, the peak of inflation is likely behind us. And if we keep getting positive reports about the pace of inflation slowing, then mortgage rates should go down as well. Austin Klar. Inflation peaked back in June of last year at 9.1%, and by the end of the year, the latest CPI reading said that it was at 6.5%. Another reason why you shouldn't expect the market to crash today like you did in '08 is because the lending standards back in '08 were nowhere near as strict as they are today. You had, you know, companies doing no income, no job, no asset loans, lending to people without doing any serious underwriting to people who couldn't afford the homes that they were, that they were getting into. That doesn't happen today. What that means is that people can afford to make their payments and they're not underwater on their loans and they're not likely to go into foreclosure, you know, if the value of their homes, you know, takes even the slightest dip. And that leads me to my third point, which is that foreclosure activity today is nothing like we saw, you know, in 2008. Foreclosures were up in 2022 compared to 2021, but nowhere near the levels we saw during the financial crisis in '07, '08, '09, you know, when they peaked in 2008 at 2 million foreclosures compared that to, you know, the 88,000 consumers that are in foreclosure today. And people have record amounts of equity in their homes compared to '07, '08. So the bottom line here is that you shouldn't be concerned about a housing bubble that is going to crash because the market dynamics that we see today are completely different from what we're seeing in 2008. Okay, so the market is not gonna crash, but what happens if we go into a recession? Well, if you look at what happened historically over the last 6 recessions, you can see that a recession doesn't necessarily mean that there's going to be a reduction in home values. If you look at this graph, you can see that by and large over the past 6 recessions, home prices more or less were stable or actually increased during the recessions, except for 2008, which was caused directly by issues with the, with the housing market itself. So prices aren't necessarily going to crash or not necessarily going to go down significantly, you know, year over year. Even if there's a recession. So what does that mean in terms of, is it a good time to buy? Is it a good time to sell? So if you're a potential buyer, you know, over the next several years, you maybe you can afford to buy now, but you're not sure whether now is a great time. What you really need to be thinking about is what type of market you want to be buying in. Because things have slowed down compared to, you know, their peak in 2021 and early 2022, By and large, there's less competition on any given home. Homes are receiving, you know, less offers than they did before. You know, a lot of people are getting into homes being the only offer, or maybe they're competing against only 1 or 2 other people instead of, you know, 30 people for the same house. And because there's less competition, buyers are able to, you know, if they want them, have contingencies in their offers. Homes are on the market for longer, so buyers have longer to make a decision about whether or not they want to buy a home. They have longer to look at other homes if they want to, and they're also able to negotiate with sellers over things like the price, right? You don't have to bid hundreds of thousands of dollars, and I even saw multimillion-dollar over-ask bids, you know, in the peak of 2021 and early 2022. You don't have to do that anymore because as a buyer in today's market, you might be one of one or one of two people actually looking at a home, and a lot of buyers are actually getting concessions from sellers on top of, you know, getting things for under ask and getting, you know, into escrow with contingencies. They're getting credits for the cost of repairs, credits for closing costs. A lot of sellers are offering to pay money to buy down or lower buyers' mortgage rates and get their effective rates down sometimes 1 or, you know, 1.5, 2 percentage points, which saves buyers hundreds of dollars a month. Also, you know, if you are buying in today's environment, because you're buying things at a potentially lower price than you were, you know, if you had to compete against a bunch of people during the, you know, the peak of the pandemic, Because you're getting things at a lower price, you're paying less down. So you're able to keep more cash in your bank account by not buying things, you know, as high as you would've had to if you were buying something during the peak of the pandemic. You know, there was a property that I was looking at for a couple of clients that was a really nice, you know, 2-bed, 2-bath in the Presidio Heights neighborhood of San Francisco. The owners bought it in 2018 for $2 million., and they ended up selling it for $1.66 million late in 2022. So instead of, you know, if you're putting 20% down for, for the home in the low interest rate environment at $2 million, you're coming out of pocket $400,000. But if you're doing it in a higher interest rate environment, the people who bought it at $1.66 only had to put down $320,000. So they had an extra, you know, $60,000, $70,000 in the bank compared to the people who, yes, they bought it at a lower interest rate, but they had to come out of pocket way more. So they had to save up a lot more to make that down payment for the same exact house. And also because they're getting it at a lower price, they also have lower property taxes, which is based on the assessed value of the house, which is, you know, when you buy a house, it's the purchase price of the house usually. So because they bought it at a lower price, they're getting lower property taxes and those lower property taxes help offset the higher interest rate payments that they have. So by getting it at a lower price, effectively, you know, 6% rate, for example, they're paying the same amount per month as somebody who bought the house for $2 million but had a 3% interest rate. So by buying in today's higher interest rate environment with a little bit less demand and a little bit less competition, you're able to get the same exact house for a little bit less money than you would have if you were competing against a million other people in 2021 and 2022. Yes, your interest rate probably would have been lower, maybe a lot lower in 2021 or early 2022,, but your home price would have been higher. So there are different levers to pull when you are figuring out what your monthly payment is going to be. So I always tell people not to let higher interest rates deter them from getting into the market because they're able to get things at lower prices than they were in the lower interest rate environment, and because those lower prices mean lower taxes, which offset those higher interest rate payments. And on top of that, to the extent interest rates go down, which I, you know, as I've already explained, I believe that they will, you'll be able to refinance your mortgage, exchange your mortgage with a high rate for one with a lower rate and lower your payments even more. So people who bought their house, you know, very recently in a higher rate environment might ultimately end up paying less or substantially less than people who got their homes, you know, a year or two ago at a much lower rate, but at a much higher price. So if you're thinking about what type of market you want to be buying in, if you believe what I'm saying, that interest rates are going to go lower, and that demand as a result is going to reignite and more people are going to reenter the housing market and spur competition again, then, you know, I would suggest considering pulling the trigger on something sooner than later because you might end up having to spend more for the same exact or very similar house. If you're a seller, it's a similar consideration. A lot of times, you know, sellers buy or sell their house and then they have to buy another one, right? Maybe it's an elderly couple that has a huge house they raised their kids in. But now they're older, kids are, you know, off to school or, you know, grown up themselves. They don't need this massive house anymore, so they want to downsize. Or maybe it's a young couple that, you know, was okay living in a 2-bedroom, but now, you know, one of them works from home and they just had a child or maybe a second child. They need to move to a bigger house. They have to upsize. So a lot of people have to sell their house and buy a new one. So if you're one of those people that is considering selling and is going to have to buy, you should consider what kind of market you want to be buying in. Mm-hmm. And yes, it is true that as a seller today, maybe you're not selling your house for as much as you would have, say, if you sold in 2021 or early 2022, but then you're not spending as much when you have to go buy your next house for all the reasons that I just described. So it's a little bit of a wash. Had you sold earlier and made more money, you would've had to spend more money on your next house, but now you're selling for a little bit less, but you're buying your next one for a little bit less. Mm-hmm. And, you know, for sellers who maybe they don't need to buy another house, it's not as if you're in a bad position today by having to sell your house, right? As I said before, you know, if you bought your house more than, you know, a year ago, chances are you have equity in your home. You'll be able to profit on the sale of your home compared to when you bought it. So it's not as if you're losing money by selling today. You're still in a very good position. Maybe it's not the exact same position that you were— that you would have been in if you were selling, you know, at the beginning of 2022, but you're still in a very good position compared to what you were maybe in 2020 or '19 or '18. Or if you bought your house much longer ago, then you're in a very good position. So if you're thinking about buying or selling in today's environment and want to know, you know, what decision is best for you and what timing you think makes sense, reach out to me. I'd be happy to talk through that with you. I'd be happy to put you in touch with lenders who can talk through that with you. There are, there are a number of different professionals that you need to speak to in making those kinds of decisions, and I'm happy to get that started for you. for you. The bottom line is I think we're heading into a place of a lot more balance and a lot more stability in the market. It's going to be somewhere between the frenzy of 2021, early 2022, and, you know, the dead of winter in late 2022. I know I just threw a lot at you. If you have any questions or if you want information about particular properties or about particular communities in San Francisco, definitely reach out to me. My contact information is in the description below. I will personally answer every call, every email, every text. I'd be more than happy to help you. And if you like videos like this and want more, make sure to subscribe to my channel and don't forget to click the bell so that you're alerted every single time I post a new video.