Tech-centric housing markets in the United States, including cities like Seattle, San Jose, Austin, and Phoenix, are experiencing a notable cooling trend, according to insights from national property broker Redfin. This cooling phenomenon is particularly pronounced in areas that were hotspots for pandemic-related migration, as well as those heavily reliant on the tech sector, which is currently facing challenges.
Among these cities, Austin, Texas has witnessed the most significant cooling over the past year as the housing market transitions away from the heightened activity seen during the pandemic.
The Federal Reserve’s decision to raise interest rates to counter inflationary pressures, leading to an uptick in mortgage rates, has played a pivotal role in this shift. Following Austin are cities like Seattle, Phoenix, Tacoma in Washington state, and Denver, Colorado.
Additionally, Las Vegas, Stockton in California, San Jose, Sacramento, and Oakland, also in California, are among the top 10 cities experiencing the fastest cooling in their housing markets.
The West Coast’s real estate landscape, particularly in tech-centric hubs such as Seattle, San Jose, and Oakland, is experiencing a notable shift influenced by various factors including high mortgage rates, limited housing supply, and a wave of tech sector layoffs.
Indicators of home purchasing activity and market competition have seen a rapid decline in these tech hubs. For instance, in San Jose, the median home sold for a mere 0.6% above its asking price in February, a stark contrast to the 12% above asking price recorded just a year ago.
This drop-off represents the most significant percentage-point decrease in the entire United States. Similarly, Seattle experienced a substantial decline, transitioning from 8% above asking price to 1% below over the past year. Moreover, pending home sales plummeted by 40% year-over-year in Seattle and 38% in San Jose.
Redfin conducted inquiries among its agents to gauge the impact of several factors contributing to this cooldown, including the surge in tech sector layoffs, market volatility, and banking uncertainties. The findings suggest that coastal hubs are cooling rapidly due to a combination of reasons.
Some agents attributed the slowdown to layoffs and the instability of tech stocks, which have deterred potential buyers. Meanwhile, others pointed to factors such as exceptionally low housing inventory levels; notably, San Jose and Oakland are among the top five metro areas in the United States experiencing the fastest decline in new property listings.
The housing markets in prominent tech hubs are undergoing a rapid cooling phase, driven by a confluence of factors that are reshaping the real estate landscape in areas such as the Bay Area and Seattle:
- Volatility in Tech Stocks: The tumultuous performance of tech stocks, which experienced a significant decline of more than 30% in 2022, has particularly impacted regions heavily reliant on the tech industry, including the Bay Area and Seattle. As tech employees often utilize stock proceeds for down payments, the instability in tech stocks has substantially affected the purchasing power of prospective buyers in these areas.
- Tech Industry Layoffs: Tech layoffs, predominantly concentrated in the Bay Area and Seattle, have become widespread. Many buyers have either withdrawn from their home search or terminated contracts due to concerns about job security or actual job loss. The dwindling prospects of tech employment have also dissuaded potential first-time buyers from entering the market altogether.
- Limited Housing Inventory: Despite some residents being undeterred by layoffs and market fluctuations, the scarcity of available homes for sale has restrained demand. The inadequate inventory levels have hindered both existing and potential buyers from making significant purchasing decisions.
- Unsustainable Pandemic-Driven Price Increases: The rapid escalation of home prices, particularly during the pandemic period, has rendered housing increasingly unaffordable for residents outside the tech sector. With the current struggles in the tech industry and the prevalence of high mortgage rates, a larger segment of the local population is finding homeownership financially prohibitive.
- Elevated Mortgage Rates: Mortgage rates have surged to approximately 6.4%, more than doubling the record lows observed in late 2020 and early 2021. This substantial increase in mortgage rates has significantly inflated monthly housing payments, making homeownership less attainable for many prospective buyers, especially in pricey markets like Seattle.
- Persistent High Home Prices: Although home prices in the Bay Area and Seattle have begun to decline, they remain
considerably elevated due to the persistent shortage of inventory. The typical home prices in San Jose and Seattle, standing at $1,250,000 and $710,000 respectively, far exceed the national median of $386,000, exacerbating affordability challenges amidst rising mortgage rates.
Despite the recent cooling trends observed from February 2022 to February 2023, some agents are witnessing renewed competition for homes priced reasonably and accurately, as mortgage rates ease and inventory remains constrained.
However, uncertainties surrounding the stability of the banking and tech sectors, exemplified by the recent collapse of Silicon Valley Bank, continue to influence buyer and seller sentiments, albeit to varying degrees across different markets.
