2023 R.E. Market Review

As 2023 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 always is: “Where is the real estate market headed?”

The end of this last up-cycle in real estate finally ended last year, which started the downward trend that continued this year with higher inflation rates and rising interest rates causing even slower sales. With COVID-19 mostly under control, the focus turned to issues such as crime, homelessness, affordable housing, inflation and how to make the City better. Following is a short recap of what happened in our local San Francisco 2023 market.

The market started the year slow with the holiday carryover from 2022 and remained that way throughout the year. Sellers trying to sell were disappointed by the market reaction to their properties. If the home was all fixed up, in a desirable location, and at an attractive price, sellers were still able to get good prices as there are still buyers around. However, if there were some defects, the property might sit on the market for some time and sell at a discounted price. Then, as interest rates steadily increased during the year, sales slowed and prices dropped further.

The mortgage interest rates were in the 6-8% range throughout the year, coming down to about 7.5% at the end. The good news is that the latest numbers show the inflation rate moderating, and the Feds signaled that they might be done with raising rates. That resulted in a significant decrease in interest rates right before the end of the year. Economists are predicting that we might see rates in the 6-7% range next year. 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.

Our preliminary numbers are showing that our sales in San Francisco will be down about 28% and prices down about 8% from 2022. I will do a more thorough 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 2012-15. The next few years came with a slower or normal rate of appreciation.

In 2020, COVID-19 hit the market and we had a stoppage in the market for a couple of months before sales came roaring back strong with people reconsidering their long-term housing situation and taking advantage of 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.

In 2022, the down cycle started, then continued in 2023. Inflation was still high, and the Feds kept raising interest rates to try and keep it under control. They raised it a total of 1% in four separate increases. With each increase, mortgage rates rose accordingly.

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 the last couple of years they followed the fed fund increases pretty closely.

So, where is the market heading in 2024? I believe that we began our down leg in this real estate cycle about a year ago. Normally it is about seven years up and three to four years down and flat before we recover. We are currently back to about 2018-2019 prices. I expect prices will continue to slide in 2024 and hopefully bottom sometime during the year. I do not believe that our economy is as bad as in 2008-10 during the financial crisis years, so I am not looking for that type of crash to our real estate market.

Next year also is a presidential election year where President Joe Biden will do everything within his power to bring the interest rate down and the economy up before November. Locally, it will be a big election year with the mayor facing at least two major opponents and all the odd-numbered districts’ supervisors are up for election. All of the politicians will do what they can to present a bright picture for our country and for San Francisco.

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 can still sell the property at the right price. If you are a buyer, I would recommend proceeding with caution as large price appreciation will not be back for a few years but there are opportunities out there. If you are a real estate investor, now might be a good time to pick up properties that you could not have afforded 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 2024!

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.