2022 R. E. Market Review

By John M. Lee

As 2022 comes to an end, we have had an interesting year in the real estate market. The question being asked at the end of the year is always, “Where is the real estate market headed?”

This last up cycle in real estate finally ended this year with higher inflation rates and rising interest rates causing slower sales. With the COVID-19 vaccine and the worries about the pandemic diminishing throughout the year, the focus turned to issues such as crime, homelessness, affordable housing, inflation and the mid-term elections. Following is a short recap of what happened in our local San Francisco 2022 real estate market.

The market started the year fine with carryover buyer demand from 2021. Homes were selling briskly as buyers were trying to take advantage of the historic low mortgage rates in the 3% range before it went up. Sellers were taking this opportunity to cash in on one of the longest runs we have experienced in this area, from about 2009 to 2021. Then, as the interest rates steadily increased during the year, sales slowed down and prices dropped.

At the end of the year, mortgage interest rates were in the 6.75-7.25% range, bringing purchasing power substantially lower. The good news is that the latest numbers are showing the inflation rate moderating, and the Feds might be done with raising rates at such an aggressive pace. But just remember – recessions always follow periods of inflation. I believe that we are already in a recession, but it will not be confirmed until the data is in and the economists have a chance to weigh in on it.

The preliminary numbers are showing that our sales in San Francisco will be down about 22% and prices down about 8% from 2021. I will do a more accurate analysis of our local Richmond and Sunset districts next month.

What does this mean? Will this downward trend continue? Will prices continue to drop?

The readers of my columns know that our market bottomed out in 2009 and we have been in a strong recovery mode ever since, resulting in large double-digit appreciation from 2012 to 2015. The next few years came with slower or normal rate of appreciation. In 2020, COVID hit the market and we had a stoppage in the market for a couple of months before sales came roaring back strongly with people reconsidering their long-term housing situation and taking advantage of the low interest rates. Our market here on the west side did very well as the trend of moving from high-density to low-density locations was evident throughout and created much demand in the Richmond and Sunset districts. Prices increased here more than other parts of the City.

2022 started very well with the usual spring market demand of limited listings and overbids. We were, however in for a roller coaster ride. The Feds started increasing the fed funds rates to tame inflation. First, it was .25% in March, then .5% in May, and then more aggressive increases of .75% from June to November for a total so far of 3.75% this year.

While movement of long-term mortgage rates track closer to the 10-year treasury yields, the fed funds rate is one component that can affect it. Mortgage rates are more complicated, but this year they followed the fed fund increases pretty closely. So, starting mid-year, with the interest rates rising steadily and the Feds signaling that the consumers will feel more pain before it gets better, our real estate market slowed down, meaning there are fewer sales and lower prices.

So where is the market heading in 2023? I believe that we have just begun our down leg in this real estate cycle. Normally it is about seven years up and three to four years down and flat before we recover. We are currently back to about 2020 prices at the moment. I expect that prices will continue to slide in 2023 and hopefully bottom out sometime next year. It looks like inflation is moderating and the Feds have signaled that they will not be as aggressively increasing rates. I do not believe that our economy is as bad as it was in 2008-2010 during the financial crisis years, so I am not looking for that type of crash to our real estate market.

We are fortunate in San Francisco that despite the problems we have, we are still a desirable place to live and there are still buyers purchasing. So, if you are a seller, though the prices are lower now, you will still reap the benefits of most of the appreciation for the last decade. If you are a buyer, I would recommend proceeding with caution as large price appreciation will not be back for a few years. If you are a real estate investor, now might be an opportunity to pick up properties that you could not have the last few years.

I enjoyed speaking and exchanging emails with you this past year. Many of you had some great questions and insights about our market and the Richmond and Sunset districts. I wish you a safe holiday season and a prosperous 2023!

John M. Lee is a broker with Compass specializing in the Richmond and Sunset districts. If you have any real estate questions, call him at 415-465-0505 or email at johnlee@isellsf.com.