Some segments of the Silicon Valley real estate market seem to have entered a transitional market phase. We’ll go over what that means and what is expected below.

What is a transitional market?

A transitional real estate market is underway when shifts happen in the buyer – seller dynamic. It may not be a full change or reversal from seller’s market to buyer’s market, or vice versa, but the trajectory changes and expectations change, too.

For the last 2+ years, the home sellers have had nearly all of the power. Homes have been selling fast, with many buyers bidding on available properties, with no contingencies, quick escrows, free rent backs, you name it. That’s been the case all over the country, but perhaps to a more extreme level here.

For example:

• homes that sold with 21 offers a few months ago might sell with 3 – 5 offers (or perhaps just 1)
• if properties were pending in 7 days on an “offer due date” last season, it may go to 10 days without a deadline
• if sales were largely without contingencies, we may see them start to reappear
• in extreme change from today, sellers may again pay for Section 1 termite work and repairs or even help with buyer loan costs by paying points

Price strategy change, too:

Right now, most homes are offered for sale at prices that those sellers may be unwilling to take. (My advice too my clients is to not list it lower than you’d actually take it if it takes a few weeks to sell and you get just one offer.) Listing agents know that if it’s priced attractively, it will get more offers and probably push the eventual price higher than what might be anticipated if the home were put on the market closer to the expected value.

In transitional markets, that gap between the list price and the sale price shrinks – we stop seeing mirage pricing that confuses many buyers. Listing agents may begin to advise sellers to list with “transparent pricing”, or what the sellers expect or want. Sellers may pay for rent backs – if they can still get them.

Conditions leading up to today

It is well known that our Bay Area housing market has been overheated to an extreme ever since Covid showed up. Prices accelerated at the fastest pace that most of us who’ve been selling homes for a long time had ever seen. Prices have roughly doubled since about 2015 or 2016. I’ve seen some neighborhoods where home prices rose 30% in less than 6 months.

Here’s a quick view of the median sale price of single family homes or houses since 2005.

Late 2017 seemed to just keep rising into 2018 without the seasonal break we often see in the second half of the year. Late 2018 and 2019 were cooler.  (In October 2018 I wrote about the cooling market.) We also had some cool-down blips in the second half of 2016 and the second half of 2014. The market heats up and it cools down.  But by how much is the question.

With interest rates rising, the stock market plummeting, inflation raging, and war in Europe, it’s no wonder if the market transitions. Most of us would say it’s overdue.

What is changing right now?

It’s not uniform or even a big minority of cases, but right now we are seeing some areas, price points, and homes sell with fewer offers than expected, or slower than has been the case recently. We are beginning to hear of some offers being accepted with contingencies. This is a change.

Even so, prices continue to rise. Where homes were selling for ultra high prices backed by two dozen offers, those same levels of high prices are appearing with just a couple of offers.

In our real estate practice, we have seen buyers either get priced out of the market or drop out of the market. Some are on the sidelines until a shift happens to make it all less imbalanced. Others got pushed out between rising interest rates and rising home costs. We are also getting a noticeable uptick in people interested in selling who are reaching out to us. We do need more inventory. A large influx of it would also change the buyer – seller power dynamic.

The best analogy I can give for what we are experiencing right now (and hearing from our Realtor friends) is what happens when popcorn starts to pop. If this is a transitional market that we are entering, the beginning is like having just a few kernels of corn pop. For a while it’s not many, but then it’s more, and then more, and then they are all popping.

It could just be a blip, a brief opportunity for buyers

At the same time, you can see from the graph above on the median sale prices in San Jose that the market is usually going up or down, and seldom is flat. We could be in a little pocket of time where the market is just catching its breath. We see that many years, and it can really fool people into thinking we’ve had a market change, while instead it was just a little breather. These blips showed up in 2014, 2016, and 2018 (late) and  2019 (early).

Transitional market expectations

Most real estate economists expect prices to either rise more modestly or to level out. Almost no one is predicting a correction at this point, since unemployment rates are low and most home owners have tremendous equity.

From any study of the real estate market, it is clear that home prices do sometimes come down. It may not be so dramatic as during the Great Recession, but it is a fallacy to believe that home prices only rise. Often we get a correction (10% price drop) about every 10 years.

Are we overdue for a correction? Absolutely.

Some economists think that may happen in 2023, but no one knows.

It’s not usually possible to time the market (stock or real estate), so if you are looking to buy or sell, normally I suggest doing so when you are ready and things work for you to do either one. If you buy for the long run, purchasing almost anywhere in the cycle – including in a transitional market – can work out well.

Related resources:

Real estate market statistics for Santa Clara, Santa Cruz, and San Mateo Counties (our site)

California Association of Realtors housing stats (updated monthly by area)

Mike Simonson, Altos Research YouTube channel (weekly real estate updates for the nation)