It’s not quite 2008, but rich homebuyers in the Bay Area may be holding their purses and wallets a little tighter in the new year.
Luxury home sales fell rapidly in San Francisco last year, and the downward trend only accelerated in the final quarter of 2022. The Bay Area clocked 35 ultra-luxury home sales—properties worth at least $5 million—in December, down 69% from the same month in 2021, according to a Compass Real Estate analysis.
San Francisco proper saw only 21 total luxury home sales in December. Of the top 10 most expensive home sales in 2022, only two occurred in the last half of the year.
The main cause? The same worsening economic conditions that pummeled San Francisco’s markets, causing sweeping rounds of layoffs and emptying office buildings in the city’s Downtown corridor. According to Zillow estimates, these conditions are expected to deflate the overall market, lowering the average SF home price by roughly 3.6% by October 2023.
“Since mid-year, large changes in macroeconomic conditions—exemplified by soaring inflation and interest rates, and declining stock markets—started to let the air out of overpressurized markets,” said Patrick Carlisle, chief market analyst at Compass Real Estate. “That's what has been going on in the second half of 2022: not a crash on the highway at high speed, nothing like the 2008 meltdown, but a significant slowing nonetheless.”
Growing economic anxieties contributed to four straight months of declining luxe home sales. And real estate agents say that dwindling luxury home sales represents a significant market correction that comes after a dramatic, long-term upward cycle in the Bay Area luxury real estate market.
“The 10-year upcycle was caused by a number of general macroeconomic factors, but supercharged [in San Francisco] first by our spectacular high-tech boom, with its huge increase in employment and astounding growth in wealth,” Carlisle said. “And then the strange dynamics of the pandemic boom, which was initially spearheaded in the Bay Area by affluent homebuyers.”
Paralleling the tech industry’s rhythm—a rapid scaling-up during the pandemic, followed by layoffs—Carlisle says that the Bay Area luxury housing market peaked due to the same kind of “irrational exuberance” by sellers and buyers.
It’s not just San Francisco; communities across the Bay Area are all seeing a significant decline in luxury home sales. This downward trend is prevalent even in cities like Palo Alto, which borders Silicon Valley and Stanford University, and generally boasts one of the most expensive housing markets in the area.
So What Comes Next?
Experts caution that the health of SF’s real estate market moving forward will largely depend on both money and mindset.
First, the city needs to see a resurgence in general macroeconomic conditions, such as declining interest rates and a leveling out of home prices. But also important will be a growing sense of financial confidence among luxury home buyers, who might be hesitant to drop millions in an unstable market and in a city heading toward a tech-driven recession.
But real estate and financial markets operate in cycles, and SF’s current economic troubles may actually create the prime conditions for buyers hoping to score a good home deal. And it helps that there is a tremendous amount of household wealth floating around the SF Bay Area—so much so that the city still secured 412 sales of luxury homes worth well over $5 million in 2022.
“It is an excellent time for buyers to aggressively negotiate home purchases at prices well below those of recent years,” Carlisle said. “This is probably especially true of the luxury and ultra-luxury condo markets located in the city's Downtown/high-tech district, full of world-class buildings and spectacular units, but hit harder than any place in the city and the Bay Area by the factors mentioned earlier.”
Just know that you might not be living next to Steph Curry any time soon—the Warriors’ point guard recently said no to a luxury Downtown apartment in SF.