The Bay Area real estate market took a wild run in 2022 as the mortgage interest rate saw its fastest rise since 1972 and the hype of the tech economy created during the pandemic began to unwind. The year started with record highs and ended with a big cooldown.

Looking ahead in 2023, the market has some unwelcome catch-up to do: All three stock indexes locked in their worst year since 2008 with NASDAQ losing more than 30% at the end of 2022. As the Bay Area’s housing market relies on the tech economy, a 5-10% decline in home prices is very likely, followed by a very slow recovery as the Federal Reserve just reminded us there might not be any rate cut in 2023.

This is a very different picture than the start of 2022 when home prices surged to record numbers in early spring before falling about 25% (based on Santa Clara County monthly data) toward the end of the year. Approximately half of the decline was seasonal, and the other reflected the drastically changing economic environment, which we find ourselves in now.

In the fourth quarter of 2022, the number of new listings dropped to its lowest in five years and declined 30% from the same period in 2021. Of those homes listed, only 68 went into the contract, or 55% less year over year. Many homes remained unsold at the end of 2022 and will likely come back on the market this year. Among the 43 single-family homes that closed, only 15 were sold above the listing price. Not only were there fewer listings, but at 26 days on the market (on average), homes also took longer to sell.

All Midpeninsula cities experienced a double-digit drop in inventory in 2022. The number of new listings declined between 15-16% for Palo Alto and Los Altos, while Menlo Park had the biggest drop of 26%. Demand fell more quickly than supply. The number of homes sold in Palo Alto and Los Altos declined by 33%, and Menlo Park was down by more than 40%.

The annual median price, however, held well. The median price of a single-family home in Palo Alto was $3.6 million for 2022, on par with 2021. In Los Altos, it was $4.2 million, up 2% year over year, and Menlo Park was $3.14 million, up 5% year over year. On an annual basis, home prices are still at a record high for all three cities.

Various neighborhoods performed differently in 2022. Young families moving up continued to prefer Los Altos and Menlo Park over Palo Alto for the latter’s lack of bigger and newer homes. Within Palo Alto, the Professorville neighborhood, at a median price of $5.37 million, was the most pricy neighborhood in 2022 with only six transactions. Old Palo Alto had the most expensive sale in the year at $28.5 million. This contemporary home at Waverley Street marked the third most-expensive sold home in the city’s history.

As we move forward into 2023, home supply may keep declining as slow turnover, soft pricing and high mortgage rates force potential sellers to have second thoughts. The “slow turnover” and “soft pricing” are relative and may only apply to local sellers who’ve been monitoring the market closely. On an annual basis, the home price is still at a historic high. Moreover, for those who plan home sales as part of a series of other financial transactions, such as 1031 exchanges, it is still a good time to sell.

This year is very likely to remain a buyers’ market. The percentage of homes sold over the listing price in Palo Alto fell to 30% in the last quarter of 2022 from 61% in the same period of 2021. It means less competition and increased bargaining power for the buyers. Tech engineers were the top buyers for a very long time. With the tech economy being the center of the unwinding pandemic hype, we’ve finally started to see a more balanced and diversified buyer pool. For those who’re still actively searching, now is an excellent time to negotiate a good deal on your dream home.

Xin Jiang is a real estate agent with Compass in Palo Alto.