Bay Area homes less affordable as interest rates rise

Few homes for sale, high prices, fierce bidding wars — and now higher interest rates — have seeped into the Bay Area real estate market.

Rising interest rates have pushed monthly payments for buyers up nearly 7% in the last month, and more increases could be on the way.

The Federal Reserve recently signaled it could raise the target rate for borrowing funds at its March meeting. The average rate for a fixed, 30-year mortgage has climbed from 3.05% on Dec. 23 to 3.55% on Thursday, approaching its highest level during the COVID-19 pandemic.

Local real estate professionals say the impact of higher rates could be muted for many in the Bay Area — where most buyers are wealthier, have higher incomes and can fit the increase into their budgets.

Jodi Fischer, a loan officer at All California Mortgage in Novato, said lenders are predicting a more balanced housing market will soon arrive, “but it’s not necessarily going to be a buyer’s market, it’s just going to be less frenzy.”

In Marin, she said, plenty of people may still have smaller financial portfolios that are impacted by higher interest rates, such as first-time home buyers and those who need a larger loan. By comparison, those who are refinancing their homes will have more equity “to play with in their homes.”

“These are still historically good interest rates — it’s just that they’ve moved up and it’s much more of a purchase market,” she said.

Jeff Tucker, senior economist at Zillow, a real estate data company, said the rise in interest rates came more suddenly than many predicted. U.S. home prices also rose to record levels last year, driven up by a low inventory of residences for sale and intense demand by first-time buyers and families seeking more space to accommodate remote work schedules.

Higher prices and climbing interest rates, he said, are “just a one-two punch to buyers.”

Agents say the pandemic boom in Bay Area residential real estate has followed big stock market gains, boosting the incomes of tech professionals. The expected interest rate hike sent stocks reeling — and clouded the home-buying plans for professionals who were relying on company equity grants and programs to fund part of their purchases.

Demand remains strong and the choices for buyers have rarely been more scarce. Still, the creep-up in interest rates along with rising Bay Area home prices make the region even less affordable for many families.

In September, just one in five Bay Area families could afford to buy the median-priced single-family home in the region, according to the California Association of Realtors. A decade ago, about 45% of families could make a purchase.

The average monthly payment for a new mortgage on a median-priced home in San Francisco and the East Bay rose by $924 a month between January and December 2021. The median sale price for single-family homes in the nine-county region topped $1 million last year.

In Marin, according to Fischer, average payments for a home priced at $1.5 million climbed more slowly, between $200 and $500 a month within the same period — depending on loan size and interest rate increases. She said even that cost difference would more heavily impact people who have lower incomes in Marin, and see those payments rising through the year.

In addition, the Bay Area’s high prices mean almost all buyers in the region must qualify for “jumbo loans” — with amounts exceeding $970,800 — which have more stringent financial requirements but generally carry lower interest rates. Jumbo loans now typically have interest rates about a half-percentage point lower than a standard mortgage.

In San Francisco and the East Bay, Zillow estimates the typical home value rose 17% in 2021, from $1.17 million to $1.37 million. San Francisco’s median Zillow home value index has reached $1,542,347.

Marin’s home values rose 15% to 17% last year, according to Christina Hale of Coldwell Banker in San Rafael. The median home price for a detached home in Marin County was nearly $1.49 million in December, the latest month available from the county assessor’s office.

“I figure the housing market isn’t going to slow down,” Hale said. “The interest rate is going to go up for sure, but they’re still relatively low. I remember in the ’80s when interest rates were 18%.”

She said most of her clients have to qualify for the jumbo loans, and a small percentage from out of the area have tighter budgets, although there are some cash buyers. She said even the neighborhoods once considered more affordable, like Corte Madera, have become some of the most difficult to find homes available, let alone win a bid for one.

Rita Bairley, who rents in Lagunitas, said she has given up on being able to afford purchasing a home in her own county. She also feels insecure about the stability of renting as the hot real estate market drives landlords to sell properties.

Bairley said her last residence, in Fairfax, sold despite having structural damage. She said she was given two weeks to move.

“I’m retired from teaching now because of COVID and am constantly searching for affordable housing,” Bairley said. “Laws are twisted to accommodate wealthy homeowners, and renters are disposable.”

“Unless some magical inheritance or lottery exists,” she said, “I’ll probably be a renter forever.”

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