No event defined the real estate market in 2022 more than skyrocketing mortgage interest rates. Following the Fed’s rate hike in March — the first in more than three years — an unprecedented four consecutive increases of 75 bps each led the benchmark 30-year fixed interest rate to a 7.08 percent peak in Q4. The blow to consumers’ purchasing power quickly spread from price-sensitive entry-level home buyers up the ranks to mid- and high-tier borrowers, and effectively ended San Francisco’s decade-long sellers market.

Source: freddiemac.com

Early indications that the Condo/TIC/Coop market was poised to rebound in Q1/Q2 2022 were quickly decimated as borrowing costs surged. Those in neighborhoods impacted most by the pandemic continue to take the brunt of the cool-down, evidenced by prices dropping to levels not seen in nearly a decade (and still not selling). Slower to respond to the changing climate and less keen to negotiate a deal, a number of major developers pivoted from sales to rentals or some hybrid of the two.

Demand for Single-Family homes, which had started the year on a high note, followed suit. Multiple offer situations declined, the average delta between list and sold prices narrowed, and the number of transactions plummeted. The tide change remains especially challenging for sellers of major fixers and freshly flipped homes alike who must account for soaring labor and material expenses. Aggressively underpriced listings have generally bucked the trend and landed buyers in short order, but not always and not at purchase prices of the recent past.

Across the board, motivated sellers began offering incentives and undercutting competitors in an effort to attract buyers. Credits for closing costs and interest rate buy-downs — and in the case of new developments: HOA fees, pre-paid parking and design upgrades — gained traction. In June 2022, the number of listings receiving price reductions doubled from a year earlier. Canceled listings were also on the rise by summer, some to return anew for the post-Labor Day deluge, and others not.

1288 Howard Street, a 128-unit new condominium development in South of Market that began selling in January 2022, incentivized buyers in the second half of the year with an interest rate buy-down up to four discount points. Images courtesy of SFAR MLS.

Ultra-luxury real estate delivered a mixed bag of data. While some properties finally traded after more than a year on the market — at eight-figure discounts from original list prices — others were scooped up almost as quickly as they appeared. The year’s top Single-Family sale goes to 2790 Broadway ($34,500,000), and the highest Condo/TIC/Coop transaction goes to the penthouse duo at 999 Green Street #3201 & #3202 ($29,000,000). It’s worth noting that the three priciest properties including the aforementioned Single-Family, Mark Zuckerberg’s former residence and a house on the Presidio wall all sold off-market.

Two penthouses atop 999 Green Street on Russian Hill sold together in July 2022 after just over one month on market. The combined $29 million purchase price is the highest on record for condominiums according to data reported by SFAR MLS. Images courtesy of SFAR MLS.

A testament to the market slowdown amidst elevated mortgage interest rates, recession jitters and geopolitical unease, only 1,113 Single-Family and Condo/TIC/Coop properties sold in Q4 2022. This is the lowest number for the quarter since 2008, and a dramatic decrease of 40+ percent from just one year ago (which at 1,953 is the highest in almost two decades).

 

What Does 2023 Have On Tap?

There is a plethora of conflicting predictions about where home prices are headed. Locally, home prices are unlikely to budge by any significant measure. Higher interest rates, stock market volatility and job market anxiety will affect what buyers are able and willing to pay. And sellers who don’t have to sell will stay put instead of negotiating and accepting a less-than-desirable price. All in all, expect a more balanced market, stable prices, and much less sales activity.

With limited inventory to choose from, competition among buyers may heat up for the best properties. Bargain hunters will be disappointed, and well-qualified buyers will prevail. Assuming the hybrid work model is here to stay, those homes that accommodate an office area and have a functional separation of space will lead the pack. A recession could put downward pressure on both property values and mortgage interest rates, creating a window of opportunity — but also unleashing demand that overwhelms supply.

So-called strategic underpricing will continue to be a risky move in 2023 because buyers are not in the mood to overbid. Thus, more sellers will list at or above market value, and most likely spend more time on the market before going under contract. Perhaps strategic price reductions, creating the perception of a good deal, will be sellers’ key to hitting their magic number. That said, there will always be that snazzy house in a prime neighborhood which lists for 30+ percent under value and drives a massive bidding war.

Don’t expect benchmark 30-year fixed mortgage interest rates to drop toward the all-time lows of late 2020, or even into the 4 percent range. Easing inflation and economic contraction could well lead the Fed to reverse course on rate hikes, however our trusted lending partners unanimously predict that rates at or above 5 percent are here to stay. The borrowers best positioned for success will be those who remain mindful of the longterm historical averages, follow guidance to “marry the house and date the rate,” and aggressively negotiate deals while it’s still possible.