New year, different market in January with rates rising

Double-digit price increase streak ends at 11 months

Consumers counted down the seconds to the new year, and then started playing beat-the-clock with concerns of higher interest rates around the corner in January.

Existing single-family homes climbed to 444,540 in January, a 3.4% increase compared to December when sales plummeted to a four-month low, according to the California Association of Realtors. However, January’s home sales were off 8.3% from a year ago – and the seventh straight monthly drop compared to the previous year.

With the fast-rising cost of everything from food to fuel, Federal Reserve chairman Jerome Powell expects to hike interest rates at least three times starting in March. The expected rate hikes, aimed to combat the highest inflation rate in 40 years, have caused some wanna-be buyers to jump off the fence and back into the market. Mortgage rates are close to 4%, the highest since March 2019.

“The buoyant housing market continues in 2022 as buyers returned from the holiday season to take advantage of the still-favorable lending environment before interest rates climb further,” says CAR president Otto Catrina, a Bay Area broker. “With prices leveling off, housing supply showing a slight improvement and competition easing during the offseason, buyers who missed the opportunity to buy were eager to get back to the market at the start of the new year.”

More homes but still many more buyers

When buyers returned, they found a few more homes – and slightly lower prices. 

Active listings increased 37% compared to December, and the unsold inventory index – the amount of time it would take to sell all the homes on the market at the current sales pace – increased to 1.8 months compared to 1.4 months a year ago. Despite more homes available, competition for them continues, with almost three of every five homes selling above the asking price, the lowest figure in 11 months.

The statewide median home price – meaning half the homes sold for more, the other half for less – was $765,580 in January, a 3.9% decline from December but up 9.4% from a year ago. It was the first time since July 2020 that the median price failed to increase more than 10% compared to a year ago, possible evidence of a cool down in the market.

“It’s encouraging to see the market momentum from the last two years being carried forward into 2022 and the economy continuing to recover,” says Jordan Levine, vice president and chief economist. “January’s sales remained above pre-pandemic levels, and new purchase mortgage applications are still registering strong numbers. However, a surge in interest rates in the past few weeks is concerning and will likely create affordability headwinds for buyers, which may result in housing demand being curtailed in the upcoming months.”

Cheaper markets generate bigger percentage gains

Bigger paychecks and smaller price gains increased affordability during fourth-quarter 2021, but higher mortgage rates will likely erase the modest improvement. One of every four households could afford to buy a home in the final three months of the year. Those buyers needed to earn at least $148,000, according to a recent CAR report.

The Inland Empire (Riverside and San Bernardino counties) and the Central Valley, from Bakersfield to Sacramento, enjoyed the largest annual price gains at 17.9% and 17.5%, respectively. But all of the seven major metro regions reported double-digit gains (smaller areas caused the statewide median price to drop below 10%).

The Bay Area had five counties top the $1 million mark in January, with San Mateo leading the way at $2 million, a 25% increase from a year ago. Lassen County in Northern California was the most affordable at $259,000, a modest 4% increase from a year ago.

RegionPrice% Gain/LossSales
Bay Area$1.2 million+14.3%-22.3%
Central Coast$920,400+10.9%-20.7%
Southern California$740,000+13.8%-10.1%
Los Angeles $700,000+11.1%-10.8%
Inland Empire$539,000+17.9%-5.7%
Central Valley$455,000+17.5%-3.9%
Far North$380,000+13.4%+1.9%
Source: California Association of Realtors