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First Month of 2022 - Bay Area Real Estate update

Updated: Jan 5, 2023

After a turbulent start to the year, California’s economy and housing market got a bit of a respite from the volatility. Rates held steady after big increases, the pandemic is finally showing signs of improvement, and the labor markets continue to give reason for cautious optimism. However, the Federal Reserve made announcements last week that will likely weigh on our clients and our industry moving forward as the outlook for rates deteriorates slightly from our original projections.

Rates Take a Breather After Big Jumps: After 5 consecutive weekly increases that saw the average 30-year, fixed-rate mortgage climb by more than 50 basis points, interest rates held steady at 3.55% last week. That is almost 100 basis points higher than we started 2021 with. Looking forward, 10-year bond rates, persistent inflation, and recent policy announcements by the Federal Reserve suggest that this reprieve will likely be temporary and rates are expected to resume their upward trend in the coming weeks, which should fuel additional urgency amongst would-be homebuyers over the near term.

Coronavirus Peaking After Winter Surge: After rising to levels not yet seen during the pandemic, the number of new Coronavirus cases in California has begun to decline. At their apex, there were more than 300,000 new cases being reported in California alone, which brought the 7-day trailing average to more than 100,000 new cases per day for the majority of January. Late last week, that average dipped below that threshold and the raw (daily) case volume continues to show signs of improvement, which should help to alleviate pressure on still-flagging sectors like retail.

Unemployment Rolls Remain Below 500,000 for Nearly 4 Months: At the onset of the pandemic, unemployment rolls in California swelled to the unprecedented level of almost 5 million workers filing continuing claims at their apex. Since April, those numbers have been falling consistently despite numerous flare-ups in the pandemic. For nearly 4 months consecutively, continuing unemployment claims have been below 500,000 and even though this is above the pre-pandemic average of 325,000 claims, the current level of 410,000 is inching closer to full recovery and trending in the right direction.

Economic Growth Continued in Q4, But Some Soft Spots Below Headline: The Commerce Department recently reported that the U.S. economy finished out the year on a positive note with real GDP expanding by nearly 7% on an annualized basis during the 4th quarter. However, much of this growth was due to a bump in inventory accumulation, which adds to current growth via the production mechanism. Hopefully, this accumulation in new inventory will help to alleviate some inflationary pressures that arose due to supply chain disruptions during the lockdown, but it also means that future consumption may not add as much to overall growth if it comes via drawing down the inventories that have only recently been restocked rather than from additional production in the economy.

New Listings Still Depressed: Although it is likely too early to see the effect of declining case numbers on housing supply, given that the former trend is still in its infancy, it is noteworthy that the number of homes being added to the MLS each week remains relatively depressed. Last week, there were roughly 4,200 new listings added to the MLS. That compares to almost 5,000 new listings added during the final week of January 2021, which in turn was well below pre-pandemic levels. Despite this, new listings have exceeded closed sales in 3 of the last 4 weeks, which means that the number of active listings on the MLS at any given moment is finally starting to rise after falling almost consecutively since September 2021.

Federal Reserve Broadcasts Aggressive Stance on Inflation: After their recent Federal Open Market Committee meeting, the Federal Reserve signaled that they will be taking a much more aggressive stance against inflation in the coming months. In addition to reducing the number of mortgage backed securities on their balance sheet by the summer, there will likely be 3-4 increases in the target interest rate before the end of the year. This is expected to raise the cost of borrowing for Treasuries, which will in turn lead to higher mortgage rates for consumers.

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