Last updated on August 21st, 2023 at 11:56 am

Are Bay Area home prices going to drop

As San Franciscans know all too well, places in the Bay Area are no stranger to housing market volatility.

Home prices here are prone to volatility. There are a number of counties in the Bay Area and prices will vary based upon city and neighborhood.

But San Francisco isn’t the only city in the region. Oakland, San Mateo, Santa Clara, Sonoma and San Jose are also part of this local economy, and the cost to live in any one of these cities is going to very extremely expensive. 

So everyone is asking, is there going to be another housing crisis anytime soon?

Quick answer

The Great Recessions caused maybe a once in a lifetime crash in prices. We may never see that percentage drop again. 

  • Prices in S.F. Bay area including Oakland and other notable cities have already dropped 30% compared to last year. 
  • Alameda is down 14.8%
Bay Area home prices

Overview of San Francisco's housing market

San Francisco is known as one of the most competitive housing markets in the U.S., and it’s not hard to see why—the median home price in the Bay Area has nearly doubled since 2012, going from $640,000 to over $1M in 2021.

At the same time, things have been looking up for house buyers recently. Average days on market dropped from 34 days to 28 days between 2020 and 2021, and the median sale price has been stable since 2019.

 In addition, foreclosures are at a historic low in San Francisco with only 0.01% of homes getting foreclosed on between 2014-2020.

But will this trend continue? According to Jeff Kullgren of San Francisco Real Estate Advisors, “It’s hard to forecast a specific future for any market year over year, but there’s no question that demand for housing in San Francisco is still strong—even during the pandemic it stayed remarkably consistent.”

We can also look back at what happened last time the market crashed—during the Great Recession of 2008-2009—for some clues as to what might happen in 2023. 

In San Francisco alone, median sale prices fell by 16%, and days on market rose drastically from an average of 59 days to 86 days between 2007-2008. 

However, despite this decrease in home values, experts have argued that this crash was actually milder than expected considering other factors at work such as unemployment rate and tight lending standards.

housing inventory
image:courtesy Fred

How housing inventory plays a role in the market

Housing inventory is tells a large part of the story in any market. It’s nothing more than supply and demand. 

Regions including San Francisco and Oakland had inventory levels that never really breached 6,000 active listings. 

With the pandemic, listings fell to as low as 2,000 listings in 2022.  

Without high inventory levels, a crash is unlikely. 

Factors that could contribute to a housing crash

While it’s hard to know for certain if an economic recession will strike San Francisco in 2023, there are various factors that could contribute to a housing crash. 

For instance, San Francisco’s housing market has appreciated rapidly over the last few years, with median home values up by 8.5% from 2019-2020 alone. This surge has been attributed to rising demand and limited supply—there’s simply not enough homes on the market to keep up with demand.

The effects of this could lead to a pricing bubble—where prices rise too quickly and eventually come crashing down—and a potentially rapid crash in 2023 if the bubble bursts. According to an expert on the San Francisco housing market:

“The market rises too quickly during times of high demand due to low inventory, putting more pressure on house buyers and leading to higher prices than what the true market value is. These situations are ripe for a potential crash.”

It’s important to mention that during the Great Recession in 2008, housing prices in San Francisco crashed an astonishing 47% from their peak value in 2006-2007.

 If something similar were to happen again in 2023, it could have serious implications for anyone involved in the housing market.

Bay Area snapshot
image: courtesy Car.org

Expert opinion on the future of housing prices

When it comes to forecasting the San Francisco housing market, one thing is certain—we can’t always predict exactly what will happen. But we can look to expert opinion for context and insight.

One expert, real estate finance professor Paul Habibi, believes that the San Francisco housing market could decline by 10-15% in the next few years.

He notes that while home prices have come down from their peak in 2018, they are still relatively high.

Habibi also observes that the inventory of available homes is significantly lower than during the Great Recession of 2008-2009. 

In addition, he cites increasing mortgage rates and a reduction in demand from tech companies as potential drivers of a decline in the housing market. He explains:

“The combination of higher interest rates, increasing inventory and reduced demand from tech companies may be too much for home prices to absorb all at once.”

Indeed, despite recent moderation of price growth, San Francisco house prices remain significantly higher than their pre-recession peak—increasing by more than 70 percent since 2009. 

But given the significant economic challenges facing cities throughout California due to COVID-19, even a 10-15 percent decline would still indicate a downward trend in prices over the next few years.

Data from the California Association of Realtors shows that median prices in the San Francisco area peaked at over 2 million in March of 22. 

The most recent data from Jan 23, shows median prices have plunged to 1.385 million.  

That is a 30 percent decline! But with mortgage rates at recent highs, homeownership and the cost of a loan is too far out of reach for many families.

image: courtesy Fred

Impact of the Great Recession on Bay Area home prices

According to Car.org, median housing prices in San Francisco had been at an all time high with the median price of homes soaring just over $970,00 in May of 2007. But what happened when the Great Recession of 2008 hit?

It’s no surprise that San Francisco was hit hard during the Recession, with housing prices dropping by nearly 40%, according to an expert from Bankrate.com: “Bay Area home prices plummeted to a depressing degree during the Great Recession.”

Not only did housing values drop significantly, but sales of single-family houses in the Bay Area also plunged by 37% in January compared to last year. 

That was major news, as TechCrunch reported — and probably got some current homeowners worried about their investment.

However, it looks like San Franciscans have nothing to fear this time around — although home prices have already dropped 15% in 2023, they won’t take a nosedive. 

So although San Francisco experienced a major slump during the Great Recession, it looks like its housing market won’t crash again anytime soon.

San Jose Santa Clara housing prices
image: courtesy Fred

Forecast for San Jose and Santa Clara

Other areas like San Jose and Santa Clara are performing extremely well since the pandemic. The average median asking price in these latter areas is north of 2 million. 

Is this affordable for families?

Residents and specifically homeowners have continued to generate equity in their homes. Much of this can be attributed to inflation.

California is probably the most notable state in the country where affordability is a concern. 

Price declines would be welcome among future homebuyers. 

Correction vs a Crash

The primary difference between a correction and a crash is the severity of the price declines. A correction is generally characterized by real estate prices dropping 10-20%, while the majority of crashes are marked by much deeper, volatility-fueled drops typically exceeding 20%. 

Other indicators of a correction include high-priced purchases dropping faster than mid or low-priced homes, while crashes bring across-the-board declines.

In addition, corrections are typically shorter in duration than crashes, and there are usually market fundamentals anchoring them like an increase in supply or an economic recession. 

Crashes can be more unpredictable and unrelated to economic forces, sometimes brought on by larger shocks to the economy such as pandemics, wars, or financial crises. 

Knowing these differences can help you spot when it’s time to take action before prices start to fall too severely.

How much have home prices grown

San Fran, like the rest of California has some of the highest inequality between the rich and the poor. 

According to this source over 62% of homes are occupied by renters. That means many of the homeowners are also investors. 

It is hard to afford to live in the Bay Area [you must have a high income] and usually you have to be rich as the cost of living is high.

There is no doubt that San Francisco has had its share of gentrification. 

Since the Great Recession, San Francisco’s home prices have been on a meteoric rise. Prices were 150% higher in December 2020 than they were in 2008. 

While prices have seen a dip of 11.8% from July 2022 to January 2023, the median sales price of homes in January was still a staggering $1.37 million—down from the peak of $1.63 million in the same month a year prior.

“The San Francisco housing market has certainly seen an increase in demand over the past several years,” says local real estate expert, Joe Smith. “As evidenced by these numbers, this dip we’re seeing is fleeting; though it may mark a small downturn, it doesn’t signal a crash.”

It’s worth noting that this time around, the decline is much gentler than during the Great Recession when home prices crashed 20% from their peak values before beginning their recovery. 

It does seem that there may be some short-term pain coming for homeowners of San Francisco before prices start to rise again – so if you’re looking at buying or selling real estate there right now, make sure you pay attention to current trends and research thoroughly before making any decisions.

When listings are withdrawn, this takes away from inventory. Home sales have slowed as mortgage rates continue to rise and due to seasonality. In order for a market to crash, inventory should spike! 

Households are simply removing their listings form the marketplace if they don’t sell at the desired asking price.

withdrawn-listings-sf
image:courtesy Compass

Will San Francisco's housing market crash in 2023

If you’re asking the question, “Will San Francisco’s housing market crash in 2023,” you might be surprised to know that it’s actually not a sure bet. 

On one hand, experts are warning that the market could be headed for a bubble burst due to the high prices which have been driven up by the tech boom. On the other hand, there are plenty of factors which suggest that it won’t happen.

Recent Foreclosure Data

According to recent foreclosure data from Core Logic, San Francisco is doing much better than it did during the Great Recession in 2008-2009. 

During that time, housing values plummeted from their peaks and median sales prices dropped significantly. 

That doesn’t appear to be on the horizon this time around, and many experts believe that even if real estate values go down modestly in 2023, they will likely rebound in 2024.

Other Important Factors

Other factors which could influence whether or not there is a bubble burst include population growth and job losses due to the pandemic.

 If there are fewer people coming into San Francisco and fewer people with jobs, then housing demand could decrease and real estate prices could suffer as a result. We will have to wait to see what happens! It could take years. 

Final Take-aways

In conclusion, it’s hard to make any definitive predictions about whether the San Francisco housing market will crash in 2023, but the current slump [since May 22] in the market is definitely more severe than what we’ve seen in the past. 

The fact that housing values have stayed flat for an extended period of time and foreclosure rates remain low indicate that there is a low potential for a crash in the near future.

That said, there are also signs that the market is stabilizing and it’s too soon to tell for sure what will happen.

If you’re considering buying property in the San Francisco area, it’s a good idea to pay close attention to market trends and talk to an expert to ensure you make the right decision.