November / December 2022 Real Estate Market Report

The autumn market could be summed up in one phrase: shock and awe. Following the typical summer slowdown, we expect to see the autumn market come alive with activity — the annual year-end push. But this year was different. Way different. Many factors contributed to the autumn market’s uncertainty and volatility, with the big headliner being significantly higher interest rates. Higher rates put affordability out of reach for many, causing would-be buyers to sit out the season until one of two things happened— rates came back down or prices took a substantial haircut. But neither occurred meaningfully. At least not yet.

So how about the argument that rates are still historically low? It doesn’t resonate. This could be explained in part by recency bias, where people compare today’s rates with the lows seen earlier this year and last. It turns out no one cares about what happened in the '70s. Recency bias contributed to uncertainty and hesitation amongst buyers, which brought sales volumes down precipitously.

In San Francisco, for the period 8/1/22 through 11/30/22, the total sales volume for properties over $2M was down 50% versus the same period in 2021. The trend was even more pronounced for properties over $5M, with a decrease of 64%. This is a massive drop-off.

Marin also saw a decrease in sales volume. Properties over $2M registered a decrease of 24%, and properties over $5M a decrease of 30%. Marin held up a little better than San Francisco, but there's no debating that both took a big hit in activity this autumn.

Monthly Prediction: Spring 2023 - A Period of Price Discovery

A couple of key events to watch this week could serve as market-moving catalysts. On December 13, we will see the release of Consumer Price Index (CPI) data, which will provide insight into inflation and likely dictate the pace of upcoming interest rate increases in the short term. The Federal Reserve will announce its rate decision the next day on December 14 (11AM PST). If CPI shows inflation coming down, a 50 bps rate increase will likely be the decision. But if CPI data comes in hotter than expected, the Fed may have to raise rates by 75 basis points, which could upset a lot of stomachs.

The Fed “pivot” is expected to take place in three stages which could be strewn out over a year or two. The first stage is slowing the pace of increases. Next is pausing. And the last stage would be cutting. If the Fed raises 50 basis points on December 14, it would indicate that the very first stage has commenced. All eyes would then dart to upcoming CPI data and the Fed's February meeting, where they will be announcing their next move.

In the meantime, we expect the initial shock of the new environment to ease as we get into 2023. This will pave the way for true price discovery. What does that mean exactly? As discussed, activity was significantly suppressed this autumn, so pricing metrics are neither stable nor reliable. But you can only put the real estate market in “time out” for so long. Eventually life happens. Babies are born. Jobs are gained, lost, or relocated. Household balance sheets change. Adjustable rate mortgages will be resetting for some. Cash needs to be parked. And unfortunately, the three D’s (death, divorce, and debt) are always happening no matter the market condition. Activity will have to take place. There is no stopping it.

Deals only come together when a willing buyer and seller agree. When the market changes this swiftly, it will be a contest of motivations. Whoever is most motivated to buy and sell will be setting the new comps. The old adage that real estate is priced at the margins rings true, particularly during a time of transition. This complex, nuanced time requires diligence and foresight from the most astute real estate professionals, like those at Artemis. Our team is already preparing for the upcoming period of price discovery. The spring market will be host to a whole new trading environment. The initial shock of its arrival should have eased up by then, which will allow deals to begin flowing again. Activity may be lower than normal but not as low as this autumn.

Click here to read the San Francisco report.

Click here to read the North Bay report.

That wraps up this edition of the Artemis Advisor! Thanks as always for reading, don't forget to share, and we’ll see you again very soon.