Home prices remain near all-time highs, largely due to the sustained low inventory levels, and despite the average 30-year mortgage rate hitting a 23-year high in October at 7.79%. It’s hard to overstate the full significance of higher mortgage rates on the housing market; but, in short, they are the primary driver of market slowdown. For example, when accounting for the cost of financing a mortgage, a buyer’s monthly cost for a median home today is actually 11% higher than in June 2022 when prices were at their peak. Looking further back to when the Fed began to raise rates at the beginning of 2022, the median monthly cost of a home has increased 76% from then until now.

So why have prices stayed elevated even as the cost of financing has skyrocketed over the past 22 months? For sellers, prices have to stay high or else they wouldn’t enter the market. Approximately 75% of U.S. homeowners have mortgage rates of less than 4%, according to JPMorgan, which has kept sellers from entering the market. If prices broadly contracted, even fewer sellers would come to market because they likely couldn’t afford a new house because their profit margin would be too low. Although people move for all sorts of reasons, generally speaking, there are very few sellers who are selling because they have no choice. Even if sellers were breaking even on their home sale, transitioning from a sub 4% mortgage to a nearly 8% rate is completely unappealing. Sellers who are coming to market now need to make a profit so that they can finance less of their next home in order to counteract the higher mortgage rate. Of course, this is for existing homes, but new construction isn’t much different. Material and financing costs are higher for homebuilders, too, and when a house costs more to build, the prices increase as well.

Inflation isn’t helping the market, either. People feel less wealthy than they did three years ago, and they’re right to feel that way. In just the three years from September 2020 to September 2023, the dollar has lost about 15% of its buying power, the same amount it lost over the preceding 10 years (September 2010 to September 2020). Even though inflation is declining, all that means is that prices are rising more slowly than last year — which is good, but it doesn't make anything more affordable. The combination of declining purchasing power and higher mortgage rates only reduces market participants, slowing the market.

High mortgage rates aren’t going away anytime soon because inflation is still about twice as high as the Fed would like. So far, most of the economic slowing the Fed intended by raising rates seems to be isolated to the housing market. The National Association of Realtors (NAR) reported that the number of homes sold dropped 2.0% month over month and 15.4% year over year to the lowest number of sales in the four years that NAR reports. Real GDP rose significantly in Q3 2023, indicating strong U.S. economic growth rather than economic slowdown. It’s unlikely that the Fed will hike rates at the December meeting, and very unlikely that they will reduce rates in the near future. We can expect mortgage rates between 7% and 8% in 2024, which will continue to slow the market.

Different regions and individual houses vary from the broad national trends, so we’ve included a Local Lowdown below to provide you with in-depth coverage for your area. In general, higher-priced regions (the West and Northeast) have been hit harder by mortgage rate hikes than less expensive markets (the South and Midwest) because of the absolute dollar cost of the rate hikes and limited ability to build new homes. As always, we will continue to monitor the housing and economic markets to best guide you in buying or selling your home.

In San Francisco, home prices haven’t been largely affected by rising mortgage rates after the initial period of price correction from May 2022 to January 2023. Since January 2023, single-family home prices have increased 15.9%, with the majority of that gain coming in the past three months. Condo prices haven’t experienced huge variances this year, trending horizontally. We don’t expect another wave of new listings in the fourth quarter, so the market will likely slow, which is typical this time of year, and the declining number of new listings will create price support.

Typically, demand begins to decline in the fall and bottoms out in January, so the consistently low supply should be less of an issue. With mortgage rates at a 23-year high, buyers have more incentive to compete over the most desirable homes. Because of the cost of financing, homebuyers aren’t settling for less than the best home they can find.

Since the start of 2023, single-family home inventory has followed fairly typical seasonal trends, but at a significantly depressed level. Low inventory and fewer new listings have slowed the market considerably. Typically, inventory peaks in July or August and declines through December or January, but the lack of new listings prevented meaningful inventory growth. This year, sales and inventory peaked in May, while new listings peaked in September. New listings have been exceptionally low, so the little inventory growth from February to May was driven by fewer sales. The number of new listings coming to market is a significant predictor of sales. In September, new listings rose 32%, and in October, sales increased by 37%. Year over year, sales and new listings are down 10% and 28%, respectively.

Demand spiked in October after a surge of new listings came to market, giving sellers slightly more negotiating power, and buyers paid more than asking price on average. The average seller received 96% of list in January, which grew to 102% by June. The amount sellers received declined below list price into September 2023, but rose to 101% of list in October.

Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes listed on the market to sell at the current rate of sales. The long-term average MSI is around three months in California, which indicates a balanced market. An MSI lower than three indicates that there are more buyers than sellers in the market (meaning it’s a sellers’ market), while a higher MSI indicates there are more sellers than buyers (meaning it’s a buyers’ market). The San Francisco market tends to favor sellers, at least for single-family homes, which is reflected in its low MSI. However, we’ve seen over the past 12 months that this isn’t always the case. MSI indicated that single-family homes and condos began the year in a buyers’ market. MSI declined in the first half of the year for single-family homes, indicating that the climate shifted from a buyers’ market to a sellers’ market. However, in the third quarter, MSI rose substantially, indicating a buyers’ market once again. In October, sales rose considerably, dropping MSI below three months — back to a sellers’ market. Condo MSI moved from a balanced market at the end of the first quarter of 2023 to a buyers’ market, and it has remained a buyers’ market since April.