Could Higher Interest Rates and Inflation Slow the Housing Market in the Bay Area? – Times Herald

Rising inflation and impending increases in mortgage interest rates may begin to slow the runaway housing market in the Bay Area.

Property experts and economists say the sharp rise in prices is likely to stabilize in the coming months as interest rates rise from historic lows and inflation concerns rattle the market.

“A rise in interest rates certainly has an impact on buyer psychology,” said Oscar Wei, an economist for the California Association of Realtors, or CAR. “It should have an impact on demand, sales and, of course, price.”

Rates have almost doubled in recent months, which could push some first-time buyers away. After mortgage rates hit record highs in 2021, they hit 5.1% for a standard 30-year fixed mortgage, according to Freddie Mac. Rates were as low as 2.7% in August and began to rise steadily in December. Now, Wei noted, current rates are similar to those three and four years ago. The increase can drive up a buyer’s monthly costs by several hundred dollars, though additional interest payments remain a relatively small part of a home’s budget in the high-priced Bay Area.

For now, sales are turning fast and prices are climbing fast. A record shortage of homes for sale in the Bay Area, booming demand for more work and family space in the suburbs, and a strong local economy have pushed home prices up nearly 20% from a year to year.

Cupertino agent Ramesh Rao said Silicon Valley buyers have begun to adjust their buying strategies in light of higher interest rates. More and more families are choosing to make larger down payments and maintain a similar amount of monthly cash flow. On a $2 million mortgage, for example, a higher interest rate could cost $1,000 more per month.

“At the end of the day,” he said, “everyone has a limited amount of money coming in each month.”

The Bay Area market remains driven by persistent undersupply and a growing economy. Buyers are waging bidding wars, while sellers are capitalizing on huge equity gains. The median price of an existing single-family home in the Bay Area hit a record high of $1.44 million in March, according to CAR home sales data.

March sales largely reflect a buyer’s decision to buy in February, Wei said. He expects the effects of rising inflation and rates to become more pronounced in the coming months. Central African economists forecast slower price growth in the second half of 2022. “Prices are unlikely to rise as fast,” he said.

The Federal Reserve has indicated that more rate hikes are on the horizon, primarily to control inflation. Consumer prices in the Bay Area rose 5.2% in February on an annualized basis, highest year-over-year jump since June 2001according to federal statistics.

Rising home prices and interest rates have also sent monthly mortgage costs skyrocketing in the Bay Area, according to Zillow. In the East Bay and San Francisco, monthly mortgage costs rose 37% from last March, while Metro San Jose saw costs jump 42%, assuming a 20% down payment on a single family Home.

Agents say rising interest rates and inflation have been part of their conversations with clients for months. Buyers are largely interested in moving quickly before rates rise, and sellers are looking to ensure they have healthy demand for their properties.

Mortgage rates have generally played a lesser role in home buying decisions in the Bay Area, as high home prices make up the bulk of large monthly payments.

Rao said higher rates haven’t necessarily deterred buyers. The stock market remains stable, and many tech workers are selling stock accrued through grants and options to fund down payments for a house. He noticed a small change in the market, with buyers being more demanding and willing to forgo deals.

But, he added, “right now, again, the demand is very high.”

Lamorinda agent Paddy Kehoe said many East Bay communities had so few homes for sale that prices continued to rise. Some buyers may start to back off, but that might not be enough to bring prices down.

For example, he said, one buyer might cut their budget from $3.2 million to $2.9 million, but another buyer will go from $3.5 million to $3.2 million. , which will keep demand and prices high. “The interest rate impacts affordability,” Kehoe said. “It must.”

Silicon Valley luxury agent Ken DeLeon said the market for exclusive communities remains extremely strong. Homebuyers looking for properties selling for $10 million or more aren’t concerned about interest rates, he said. “Almost everyone at this level buys everything in cash,” he said.

Higher inflation could boost demand for home ownership, he said. Investing in real estate has traditionally been a hedge against inflation.

But he sees changes in the market for first-time home buyers and the typical family looking for a mortgage. The unknowns about the spread of war in Ukraine, price volatility and the direction the stock market is heading can give a homebuyer pause, DeLeon said.

“Certainty has diminished,” he said. “Uncertainty has increased.”

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