If you are a homeowner in the Bay Area (or other high-priced areas), your house is likely your most valuable asset, and I’m sure you’re curious about what will happen to home prices in the next two years, given the market uncertainty. My crystal ball, unfortunately, is limited to historical data and what I think will happen. To further limit my predictions, I only looked at San Mateo County because that’s the county I reside in, and it’s the most important to me.
As everyone knows, housing prices are typically a function of total available income and housing costs. By using San Mateo County employment data, median income data, interest rates, and median house prices, I determined a formula for what I’ll call the Shroff House Price Affordability Index or SHPAI (Trademark Pending). Unfortunately, the most recent median income data was in 2020. Based on nationwide data, I made some assumptions about the median income in San Mateo County for 2021 and 2022, so my numbers there could be off. To forecast house prices, I projected the following:
- the SHPAI would return to pre-pandemic levels
- 30-year mortgage rates would average 6.5% in 2023 and 4% in 2024 as the Fed cuts interest rates to achieve a stable economy and housing market
- The employment base would shrink by 10,000 people in 2023 and 2024
- Unemployment will increase to 5.9% in 2023 and 7.2% in 2024
- Wages will increase by 2% in 2023 and again in 2024.
In 2022, the average median price in San Mateo County was approximately $1,420,000. Based on my model and assumptions, I believe that the average median price in 2023 will be $1,180,000 (a 17% drop from July 2022 to June 2023), and it will further decline in 2024 to $1,100,000 (an additional 7% drop from July 2023 to June 2024). While the median price is the best indication of relative home price trends, it has its biases. In recessionary times, people are more likely to buy smaller homes, and during prosperous times, people are more likely to buy larger homes. People buy smaller houses during recessionary periods, and that reduces the median price more than the actual price decrease.
As layoffs increase, people (primarily renters) will leave the area for other areas where the cost of buying a house will be less. Prices of rental homes will also decrease (alongside owner-occupied homes) because the rental market won’t be so frothy. Generally, those that already own homes in the Bay Area don’t leave as quickly because they own a home in an area that has historically been one of the best asset classes over time and property tax is relatively stable compared to other states (because of Prop 13). From anecdotal evidence, those who leave the Bay Area frequently keep their homes in case they want to return. Thus, I don’t anticipate the number of houses going on the market will increase dramatically, but the number of people who can afford houses here will decrease.
If you agree with my predictions and have money to deploy, here’s the best course of action:
- Buy as much real estate as you can in 2024. While the inventory may not rise substantially, further price cuts will allow you to buy more for your money.
- Buy the most expensive real estate since more expensive properties will be at a higher discount because fewer people can afford those homes. You’ll obtain a significant amount of appreciation when prices go back up.
While I’m frequently wrong, I’d like to think that I’m correct more times than wrong. However, how the Fed modifies interest rates and how mortgage rates play out will affect the home market. There is a good chance that the Fed will realize that the economy and inflationary environment we are in today are not the same as it was earlier this year and adjust course. By then, it will be too late.
Going beyond 2025 is just too difficult to predict anything as there are so many macroeconomic possibilities. If I’m correct in mid-year 2023, I’ll look at making further predictions based on where we are in the economic cycle.
Please contact me if you want to test out different assumptions in the Shroff Home Price Affordability Index.