San Francisco home sales volume is trending downward with its second consecutive month of decline, having dropped year-over-year by 16.6% by the end of February 2016, according to Redfin. This precipitous drop comes as no surprise to those who follow local housing patterns. Bay Area prices — which increased 5.9% from February 2015 — have long since surpassed the average purchasing power of classic San Francisco homebuyers. Competitively priced homes vaulted into the millions and are available only to extraordinarily wealthy buyers, typically those engaged in the tech industry.

Consequently, home inventory available for sale in San Francisco rose to 18% year-over-year after slowly mounting for six consecutive months ending in February 2016. The last steady inventory increase for the Bay Area occurred in 2010, before buyer demand became too high for the inventory to sustain.

With home sales volume in decline, prices still rising and inventory growing, what does this mean for San Francisco’s high stakes housing market? Has San Francisco’s depleted home inventory fully recovered?

Not by a long shot.

San Francisco’s home sales market

Although the steadily rising inventory is a sign of hope for San Franciscans who want to penetrate the housing market, the city still has a long way to go before home inventory is fully recovered and sufficient to support the seemingly insatiable demand. A healthy inventory level is a six month supply of available housing for ready and willing buyers, according to Redfin — though a four or five month’s supply is not inflationary considering a sales escrow runs less than 90 days. Currently, San Francisco’s inventory runs at approximately two months’ supply. While a six month supply is a fairly crude rubric on which to gauge inventory, it speaks to the broader problems facing San Francisco’s tight market today.

However, the present rise in inventory isn’t exactly unexpected. San Francisco home prices have escalated to unsustainable heights.  It was only a matter of time before the impossibility of purchasing a home manifested in the city’s hampered home sales. As the number one most competitive California city in which to buy in 2015, San Francisco’s high prices precede the rest of the state in the anticipated dip in home sales volume.

Home sales volume across California will also start to gradually decline as the Federal Reserve (the Fed) further increases short-term interest rates toward the end of 2016.  A rise in the Fed rate hinders buyers’ ability to obtain adjustable rate mortgages (ARMs) to reach further to purchase ever more expensive homes on riskier terms.

Eventually, the Fed activity will either lead directly to another recession or cause mortgage rates to rise. A shift in the federal funds rate influences bond market rates unless investors perceive a coming national recession. These rate increases usher in the next 30-year period of rising interest rates. As home sales volume declines, inventory will rise — a natural result of the inverse sympathetic relationship between supply and demand.

More houses for sale and lower demand will force home prices to temporarily subside in mid- to late-2017. However, this decline in price will be brief — homeowners will return to increase home sales volume once the dust from price stabilization and rising interest rates settles in 2018-2019.

However, San Francisco’s flourishing employment economy of highly skilled individuals allows high-earning buyers to bounce back into the market more quickly than the rest of the state. Thus, San Francisco’s current dip in home sales will rapidly recover once prices briefly decline in 2017.

In total, rising inventory and declining sales don’t mean San Francisco’s market is stabilizing — yet. In the meantime, proactive agents still need to direct their buyers to areas where the price is right, most likely in neighboring suburbs near public transportation or available Uber pooling. Eager buyers who can manage to hold their horses until prices dip lower will have a chance to rein in a deal before San Francisco homes scale the pricing charts once again.