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Home prices in the Bay Area are likely to continue to fall through 2023, several data sources and experts said, with San Francisco expected to take the biggest hit.
Home prices in the San Francisco metro area are forecast to see a 3.6% drop in the next year, the largest in the top 20 metros in the country, according to Zillow projections. CoreLogic projections back up this forecast, showing that home values in San Francisco have a very high probability of decline as of September this year.
Statewide, prices are also expected to fall over the next year. The California Association of Realtors estimated that the California median home price will fall 8.8% to $758,600 in 2023.
The falling prices are thanks to a combination of macroeconomic and sociological factors that have, for the first time in over a decade, pushed the Bay Area market into buyers' hands, Patrick Carlisle, chief market analyst for the Bay Area at real estate group Compass.
"Power has shifted — finally — from sellers to buyers, so buyers should feel very comfortable negotiating very very aggressively," he said.
The forecasts come as home prices and values in the Bay Area have already dropped for several consecutive months. A recent report from real estate brokerage Compass showed median condo sales prices in downtown S.F. and South of Market district are down 16.5% from a year ago, driven by "a triple whammy of economic, demographic and quality-of-life issues."
However, the San Francisco metro area real estate market remains the most expensive in the country, according to Zillow data. Though buyers have more power, getting a home in the Bay Area is still not considered affordable.
Orphe Divounguy, senior economist at Zillow, noted that's unlikely to change in 2023. Home values in the Bay Area have grown 25% in the past three years, according to Zillow, and the forecast price declines for next year still wouldn't bring values down to a level that would be affordable for most people, he said.
Carlisle said he doesn't think declining prices will bring an influx of people into the Bay Area looking to take advantage, and certainly any inbound migration likely won't come anywhere close to the population growth the region has seen in past years, starting with the tech boom in the 2010s that brought hundreds of thousands of jobs.
"There's still an astounding amount of wealth here," he said. "It would take a pretty big drop in prices to pull people in, because even with price declines we have extremely high prices."
The affordability issue means that, while all different property types are affected by price declines, more people are settling for smaller spaces that they can afford, Divounguy said.
High interest rates driven by inflationary pressures are a significant factor in why prices are expected to continue dropping over the next year, experts said, as they are pushing down demand.
Carlisle noted that in the Bay Area specifically, the market reached an all-time high in the spring, making its prices among the highest in the country and creating an overheated market. On top of that, the Bay Area's economy, which relies heavily on tech, has been hit harder by volatility in the stock market and job losses in the tech sector, further decreasing demand in the region.
But higher mortgage rates also mean that sellers are less inclined to list their home and go back into the market themselves, meaning that inventory growth is likely to remain sluggish. Divounguy said that would keep prices from dropping even more than what is forecast.
The San Francisco metro area — which includes Oakland and Hayward — is expected to see the largest decline among Bay Area metros. San Jose home prices are forecast to decline by 1.8%, while Napa prices are forecast to dip by 2.4%.
The Bay Area isn't alone. Zillow and CoreLogic both forecast that several large metros around the country, especially those among the most expensive, will see price declines.
"The Bay Area has taken somewhat of a lead in price declines, but I think we'll see the rest of the country come into parallel," Carlisle said.
But the falling prices do not signal that a crash is coming, experts said, but rather the market cooling down from an overheated position.
"Financial and real estate markets have always moved in cycles," he said. "Markets heat up, go into a period of irrational exuberance, which is definitely where we went during the pandemic…. It's part of the human economic condition."
"This downward price adjustment is a welcome one, because it could get more people back in the market," Divounguy added.
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