The Big Story, where can home prices go from here?
- Home prices appreciated faster in 2021 than at any other time, even surpassing the 2004–2006 housing bubble.
- Home prices will probably decrease before returning to a more reasonable growth rate.
- Home prices in the last 20 years increased at more than twice the rate of the median household income in California (142% vs. 65%).
- Despite record low inventory, home price growth is hitting a ceiling.
- The average 30-year fixed mortgage rate, while still historically low, rose to 3.14% at the end of October 2021.
Highs (price) and lows (inventory) of the housing market
Income is one of the largest predictors of home price growth, second only to available supply. Consumers have more money to spend, which in turn drives up prices. But the increases in income haven’t kept up with the rise in home prices, especially in the last two years. In 2020, home prices increased 10% according to the Case-Schiller 20-City Composite Index, while median income decreased by 1%.
The disconnect between income and home prices is happening for two reasons. First, the ability to take on debt means that income doesn’t necessarily need to increase at a 1:1 ratio with home prices. Second, the pandemic changed buyer preferences, increasing the demand for homes and dropping inventory to previously unseen lows.
Because home price increases outpaced income growth, homebuyers needed to take on more debt to buy a home than they would have a few years ago. But due to the drop in interest rates, the monthly payment, even on a higher-priced home, becomes more affordable. For every 1% decrease in a 30-year mortgage rate, the price of the home can increase 13% without a change in monthly payment (and vice versa). For example, the monthly payment on a $1,000,000 mortgage at 4% is almost identical to the monthly payment for a $1,130,000 mortgage at 3%, a $130,000 difference.
The pandemic also changed buyer preferences. Rather than spending roughly half of our time at home, which is the norm, we were faced with endless time in our living spaces. (You remember — you were there.) As of September 2021, the United States has 59% fewer homes on the market, and 53% of that happened in the last two years. We were happy to see more homes on the market in the second quarter of 2021 because the increased supply helped satiate the high buyer demand, but we are already seeing the seasonal shift to fewer homes coming to market. Inventory will likely remain super low in the coming fall and winter months.
The market remains competitive for buyers, but conditions are making it an exceptional time for homeowners to sell. Low inventory means sellers will receive multiple offers with fewer concessions. Because sellers are often selling one home and buying another, it’s essential that sellers work with the right agent to ensure the transition goes smoothly.
The Big Story Data
The Local Lowdown, the market is cooling but it’s still not a buyers’ market.
- Home prices increased dramatically in 2021. From January through September, single-family home prices rose 21% in Alameda and 16% in Contra Costa, while condo prices increased 12% in Alameda and 13% in Contra Costa.
- Despite decreasing inventory, the increase in home sales and speed of sales reflect the high demand in the East Bay.
- Months of Supply Inventory further indicates a sellers’ market.
The home prices moved similarly to stocks in 2021
The growth rates in 2021 are highly unusual and unsustainable; for example, home prices would more than double every four years at a 20% growth rate. After huge single-family home price appreciation in the first half of the year, it made sense that prices declined in the third quarter. During the summer months (July–September), Alameda County home prices declined 2% from July through September 2021, up 21% for the year. During the same time period, Contra Costa home prices experienced an even steeper decline: a drop from 28% in June to 16% in September.
Condo prices are near all-time highs in the East Bay. In the first half of the year, condo prices increased 13% in Alameda and 9% in Contra Costa. In the third quarter, prices contracted in Alameda, up 12%. In Contra Costa, however, prices climbed even higher, up 13% for the year through September 2021. Although the price appreciation wasn’t as pronounced for condos as it was for single-family homes, the growth rates for condos in 2021 are also unsustainable.
More Supply, no problem
Despite the increase in single-family home inventory in 2021, we’re still at a historic low. August and September are typically the months with the highest inventory every year. In 2021, total inventory didn’t come close to last year’s level and was even further away from pre-pandemic levels. Even though we’re seeing some price correction after the first half of the year, the sustained low inventory will lift prices. Currently, Alameda has more condo inventory than the pre-pandemic levels, but Contra Costa doesn’t. This could explain why condo prices pulled back in the third quarter in Alameda but rose in Contra Costa. Sales in the East Bay have been incredibly high, again highlighting demand in the area.
Homes are selling fast- really fast
Homes are selling faster than at any point in the last 15 years. The Days on Market reflects the high demand for homes in the East Bay. Buyers must put in competitive offers, which, on average, are 5–10% above the list price of the home.
Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes for sale on the market to sell at the current rate of sales. The average MSI is three months in California, which indicates a balanced market. An MSI lower than three indicates that there are more buyers than sellers on 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). MSI in the East Bay has indicated a sellers’ market for over five years now. Currently, both single-family home and condo MSIs are historically low, firmly indicating a sellers’ market.
Local Lowdown Data