Is There a Chance Bay Area Home Prices Will Drop in 2022?

Home prices in the San Francisco Bay Area have risen sharply over the past couple of years. Not even a global pandemic and economic shakeup could halt this upward trend.

Now, as we approach the last two months of the year, many are wondering if the market will shift in 2022. A common question among home buyers is: Will Bay Area home prices drop in 2022, or keep climbing?

For obvious reasons, no one can predict future housing trends with total accuracy. But if current trends and forecasts are a good indicator, it seems unlikely that Bay Area home prices will drop in 2022.

The more likely scenario is that house values will slow down a bit over the coming months — but continue climbing. In fact, that’s the general consensus among forecasters.

Will Bay Area Home Prices Drop in 2022?

Spoiler alert: There’s a very good chance home prices in the San Francisco Bay Area will keep rising in 2022. In most (if not all) cities in our region, a lopsided supply-and-demand situation will continue to put upward pressure on house values.

In mid-October, the real estate data company Zillow wrote:

San Francisco-Oakland-Hayward Metro home values have gone up 17.9% over the past year and Zillow predicts they will rise 7.1% in the next year.

Like many forecasters and analysts, Zillow’s researchers believe that house prices will rise more slowly in 2022. And that’s logical, given the tremendous gains of the past 12 months. But they clearly don’t expect Bay Area home prices to drop in 2022.

Earlier this month, the mortgage-buying corporation Freddie Mac published its latest forecast for the housing market. They predicted that home prices nationwide would end up rising by 16.9% in 2021, followed by a gain of around 7% in 2022.

Related: California housing market forecast

So this seems to be the general consensus among economists, that house values will slow down next year (but continue north).

Getting back to the question at hand: Will Bay Area home prices drop in 2022? Based on everything we’ve seen and read over the past few months, that seems unlikely. While real estate conditions vary from one city to the next, home prices in most parts of the Bay Area are expected to continue climbing — to some degree.

Tight Inventory Is a Driving Factor

Tight inventory conditions are one reason why Bay Area home prices probably won’t drop any time soon. Turn on the local news over the next few days, and you’ll probably see at least one story about the housing supply shortage.

According to a September 30 report from Realtor.com, the number of properties for sale in the Bay Area has declined over the past year. Total “active listings” within the San Francisco-Oakland-Hayward metro area dropped by -19.3% from September 2020 to September 2021, the group reported.

In other words, it’s still a tight real estate market. And that probably won’t change significantly any time soon. This is also one of the biggest reasons why the Bay Area real estate market is so much more expensive than the national average.

Mortgage Rates Could Also Be Higher in 2022

The October 2021 Freddie Mac forecast mentioned above also suggested that mortgage rates could rise gradually over the coming months. For Bay Area home buyers who plan to use a mortgage loan, this is another important trend to consider.

To quote the Freddie Mac report:

The 30-year fixed-rate mortgage was 2.9% in the third quarter of 2021. We forecast mortgage rates to increase slightly through the remainder of the year and reach 3.0%, rising to 3.5% for full year 2022.

This gives a fuller picture of what things might be like next year. (Emphasis on the word “might.”) Bay Area home prices probably won’t drop in 2022. On the contrary, they’re expected to keep climbing at a steady pace. Additionally, forecasters predict we could see higher mortgage rates next year.

Based on these factors, a strong case could be made for buying a home sooner rather than later. Of course, you have to be all-in when buying a house. You need to make sure you’re ready for it, financially and emotionally. It’s not something to be rushed.

On the other hand, Bay Area home prices are expected to keep rising in 2022. They might slow down over the coming months, but they probably won’t reverse course. On top of that, there’s the prospect of higher interest rates over the horizon. So there is a bit of urgency from a cost standpoint.