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San Francisco Bay Area Market July 2021 Update

We are already halfway through summer! I’m here to bring you an update on June’s market activity.

Inventory Trend

First of all, let’s check the inventory trend. According to the data collected by the California Association of Realtors, the Bay Area housing inventory is hitting an all time low at 1.4 months of supply in June. You may notice that the Bay Area inventory has always been low compared to the Southern California and Central Valley region.

 

Why aren’t sellers putting their homes on the market?

One major reason is the historical low interest rate in 2020 and the refinance boom that it triggered. Virtually everyone who had a job in 2020 refinanced their mortgage into an ultra low 30-year fixed rate mortgage. Seeing the ever rising home prices, sellers therefore have one less incentive to sell – their mortgage payments are lower than ever before. Many who had an Adjustable Rate Mortgage (ARM) before 2020 now have a 30 year fixed rate. Therefore, it only makes sense to hold on to the property for a longer time in order to take full advantage of the 30 year fixed mortgage.

Savvy readers may notice that the Alameda and Contra Costa county’s June prices dropped compared to May. Is this the early sign of the end of the COVID-induced real estate boom? Probably not. The slight decrease in prices is most likely a temporary phenomenon. Will the California home prices hold up in the foreseeable future? My prediction is “yes”! Even with the risk of the higher mortgage interest rate, there isn’t any sign of a sudden increase of supply. The net effect of a higher mortgage interest will be two folds. Price-wise, as long as the sellers have no urge to sell, the prices will hold up or only see very slight decrease. Volume-wise, because only those who need a home and can afford to buy at higher interest rate environment will purchase, the transactions volumes will go down. There are more sellers who would rather rent out their homes than to sell it.

Will CA home prices go down?

Now let’s turn to the next question, “what are some factors that can cause the California home prices to down?” I predict that it will take some rather extraordinary shock, such as the emergence and explosion of an asset class that offers low risk and much higher return. Under this condition, sellers will realize that they can cash out of their real estate and invest in this asset class to get a much higher return. At the same time, investor buyers will also retreat, further weakens demand.

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Lex Shan

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