Outlook for Bay Area home prices is changing. Here's the latest data (2024)

Projections by Zillow show that home values in the San Francisco metro areas will likely decrease 2.7% in the next year, compared with the 3.6% decline the real estate listings website was forecasting in December.

That comes even as tech layoffs continue and amid the collapse of Silicon Valley Bank and the crisis at First Republic, known as one of the biggest local providers of mortgages.

What’s driving the expectation of a smaller year-over-year decline? Notably, buyer demand started to rebound quite a bit after hitting near-historic lows late last year, said Patrick Carlisle, chief market analyst for the Bay Area real estate group Compass.

“We will know much more once the spring selling season, typically the most active of the year, really gets underway,” he said. “But the demand that was repressed by the economic conditions of the second half of 2022 didn't go away — it built up — and appears to be bursting forth again.”

Carlisle said home price changes are difficult to predict, especially “in a world as volatile as ours,” and that the forecasts often don’t turn out to be accurate. According to Compass data through March 19, buyer demand has been high in the past six months, shooting up since the end of the year, and has remained high despite the banking crises that erupted a couple of weeks ago.

“And considering that interest rates have been dropping in response to the local and national banking crisis, that will probably fuel buyer demand going forward,” if the pattern holds, he said.

Affordability is the top challenge facing the housing market, holding down price growth in expensive cities like San Francisco, where potential buyers are facing much higher monthly mortgage payments because of interest rate hikes over the past year, said Orphe Divounguy, senior economist at Zillow.

The projected home price decline in the San Francisco metro area remains the largest among the top 20 metros in the country. Los Angeles is projected to have a 2.2% drop over the next year, while New York is looking at a decrease of 0.8%.

But overall home prices in the U.S. are expected to go up by 1%, with the Tampa metro area forecast to have the biggest increase among large markets, at 2.3%.

“The most expensive markets are seeing a disproportionately larger cooldown in housing demand, more rapid inventory buildups and higher home value declines when compared to relatively more affordable markets around the country,” said Divounguy.

The typical mortgage payment in the Bay Area increased by 31% over the past year, largely due to mortgage rates nearly doubling, Divounguy added. That put home buying out of reach for many. However, a decrease in the number of homes coming on the market helped offset price declines resulting from cooling demand.

“New listings in the San Francisco metro are down nearly 42% year-over-year,” Divounguy said. “As a result, for-sale inventory is still 15% below where it was before the pandemic, in February 2020.”

Statewide, prices are also expected to fall in 2023. The California Association of Realtors estimated that the state’s median home price will fall 8.1% to $755,600 in 2023.

While both the San Francisco and San Jose metros have seen home values decline since last summer, their typical home values still tower over those of other major metros, at $1.09 million and $1.41 million, respectively. The Los Angeles metro, which had a much closer typical home value to San Francisco and San Jose in the mid-2000s, is now well below both at just over $862,000.

“The recent Bay Area high-tech boom was of historic magnitude — one of the greatest ever, anywhere — generating fantastic amounts of wealth and enormous numbers of new high-paying jobs, up until recently,” Carlisle said. “On the other hand, we stopped building homes in the quantity needed.”

That major growth in wealth and demand coupled with a lack of home inventory put enormous pressure on the housing market and home prices, he added. In fact, affordability of housing in the San Francisco metro area has not improved much despite declining home prices: The housing affordability index recently dipped to the lowest it’s been since the Fed started tracking it.

“If home prices do drop 2.7% over the next year, I would not find that significant as compared to the huge appreciation that occurred from 2012 to 2022,” Carlisle said. “It's not unusual for housing and financial markets to have ups and downs, and for the vast majority of homeowners, the short-term fluctuations don't really affect them.”

Many factors have been affecting the housing market in the Bay Area. Nationally, high interest rates and volatile stock markets have been a problem everywhere. Local factors include “softening in high-tech, high home prices, the extreme emptying of offices in downtown areas, population migration, state income tax rates, and state and local politics,” said Carlisle. The big decline in new listings is also a factor.

As for the Silicon Valley Bank collapse, Carlisle said that while economic uncertainty is never good for housing markets, “I don't believe that the banking crisis will impact buyer psychology negatively to any significant degree, not with the actions of the Fed and the Treasury to minimize effects on the general public.”

But he added that if the banking crisis spreads and intensifies, that could “severely impact” economic conditions and confidence.

Divounguy added that housing demand depends on several factors including per-capita income, non-housing wealth and mortgage rates, so “a widespread tech downturn might be felt disproportionately more in the San Francisco Bay Area, where tech employment and stock market wealth may have an outsized effect.”

But he added that the labor market is still strong and there’s a good chance that tech workers can still move quickly to new employment opportunities.

Reach Kellie Hwang: kellie.hwang@sfchronicle.com; Twitter: @KellieHwang,Reach Adriana Rezal: adriana.rezal@sfchronicle.com