Bay Area Real Estate: Still a Seller’s Market in 2016?

Housing analysts are calling the Bay Area a seller’s market. But what does this mean, exactly? And more to the point, what does it mean for home buyers who are trying to purchase a house in the Bay Area?

MarketWatch recently did a story about tight inventory in housing markets across the country, and how it’s making things hard for “entry-level” home buyers in particular. That’s what we are seeing in many cities across the Bay Area in 2016 — a seller’s market.

In fact, Daniel Goldstein singled out this region in the above-mentioned MarketWatch report:

“Not surprisingly, some of the lowest inventory is in the San Francisco Bay Area, where single-family homes are scarce and multiple bidding for homes on the market is the norm.”

What Is a Seller’s Market?

In real estate terms, a seller’s market occurs when demand outgrows supply. It’s when there are plenty of people who want to buy a home in a particular area, but not enough properties on the market to meet the demand. Prices tend to rise under such lopsided conditions.

The Real Estate Center at Texas A&M University offered what amounts to a textbook definition of a real estate seller’s market:

“If [housing] inventory levels are around 6.5 months, there is a balanced housing market … Actual equilibrium in any local market can differ slightly, usually between five and seven months. When inventory levels fall to less than six months, [home] sellers have more control over price and terms, often resulting in more significant rise in housing prices, also known as a seller’s market.”

In 2016, some Bay Area real estate markets have less than a two-month supply of housing. That’s a serious seller’s market.

Generally speaking, the greater the imbalance, the faster house values rise. When housing demand is very high, and supply is well below average, prices can really skyrocket. This is what’s occurring across the Bay Area in 2016. Seller’s market conditions have been driving home prices north, and have forced buyers to compete for limited inventory.

Bay Area Real Estate Market: Homes in Short Supply

The Bay Area real estate market took a major tumble a few years ago, when the nation’s housing market collapsed. Prices plummeted, leaving many homeowners upside down in their mortgage loans. We know this story all too well.

A few years later, the seeds for our current seller’s market were planted. As home prices began to “bottom out” across the Bay Area, real estate investors swooped in to snatch up properties at bargain prices. This is when the region’s housing inventory began to shrink. Then the economy improved, and more “regular” home buyers entered the market. Inventory shrank even more.

This is largely why we are seeing seller’s market conditions in the Bay Area in 2016.

The Real Estate Center’s definition above said that when inventory falls to less than six months, sellers have more control and prices tend to rise. So how does the Bay Area housing market measure up in this regard?

In August 2016, MarketWatch reported that the South Bay city of San Jose had only a 1.6 month supply of homes. In July, Climb Real Estate reported the inventory of single-family homes in San Francisco had dropped to just 1.9 months supply, while condos and lofts rose “by a whopping 57 percent to 2.7 months.” Similar conditions have been reported for cities across the East Bay, and to the north as well.

So yes, the Bay Area is a seller’s market right now — most of it, anyway. How long it will stay this way is anyone’s guess.

New Construction to the Rescue?

In some parts of the metro area, new-home construction is beginning to ramp up. Over time, this could rectify the low-inventory situation that’s affecting many housing markets in the area.

The East Bay, in particular, is seeing a lot of new construction right now. According to an August 4th article in The Wall Street Journal:

“Over the past year, the East Bay, which stretches 10 to 60 miles to the east of San Francisco and Silicon Valley, is tied for the fastest growth in new-home developments among major U.S. markets.” (Chris Kirkham, WSJ.com)

Residential development is advancing in other parts of the region as well, to varying degrees. Earlier this year the San Francisco Chronicle reported an 89% increase in building permits during the first two months of 2016, compared to the same period last year. This was for the entire metro area, which includes San Francisco, San Mateo, Marin, Contra Costa and Alameda counties.

So maybe we will see a more balanced real estate market in the months ahead. Time will tell.

To be continued: In the second part of this series, we will offer some tips for buying a home in a hot seller’s market like the Bay Area.