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Summer 2022

Leaning into Market Headwinds, Year-Over-Year Appreciation Rate Falls:

The impacts of this year’s severe economic headwinds – soaring inflation and interest rates, stock market
declines, fears of recession – on Bay Area real estate markets are speeding up. The first effect was on buyer
demand (fewer buyers, offers and listings into contract), leading to changes in supply (more homes for sale,
more price reductions), which began to alter buyer and seller psychology and the balance of power between
them. Especially after one of the longest, most dramatic upcycles in history, the psychology, circumstances
and plans of individual buyers and sellers shift unevenly in the early months of a transition as they try to make
sense of changing market realities. Eventually statistics based on closed sales – prices, appreciation rates,
overbidding, days on market – slowly start to adjust. Generally speaking, closed sales are lagging indicators of
what occurred in the economy and market weeks and months earlier.

If stock market prices are like a jet skier on a triple-espresso, home prices are like a giant cargo ship, which
decelerates and turns slowly. It took a few months from when the big economic changes began, but the high
year-over-year appreciation rates of recent years are now dropping fast in Bay Area markets – and in San
Francisco, the rate turned slightly negative in June, although the degree of any actual, longer term “correction”
to prices, if it occurs, remains to be seen.

A correction is not a crash. The precipitating factor in the 2008 crash – tens of millions of households talked
into home loans they couldn’t afford, forcing frantic sales during a recession – does not apply today. Indeed,
mortgage payments as a percentage of income are close to all-time lows (and most homeowners’ mortgages
are also at historically low rates). Outside the 2008 crash, market corrections over the last four decades typically
ran from a simple flattening in appreciation, to price adjustments of 5% to 10% (relatively small compared to
the appreciation rates which preceded them). It is far too early, with far too many factors at play, to make

An overheated market cooling or normalizing, slowing from an unsustainable rate of acceleration, does not
necessarily imply a weak market by historical standards, even if the speed and scale of the change is startling.
Monthly data can be volatile, fluctuating according to a number of factors, including market seasonality. For
example, in most Bay Area markets, it is not unusual for median sales prices to peak for the year in spring or
early summer. It is best not to jump to definitive conclusions based on a few months of data, much less a
single month’s: longer-term data is more meaningful than short-term fluctuations.

Different regions and market segments are cooling at differing speeds and each region has unique conditions –
and in the Bay Area, each home is relatively unique as well. But barring very special circumstances, markets
across the Bay Area (and the country) can be expected to eventually move in roughly parallel directions
because of the broad macroeconomic factors at play.