Could higher interest rates, inflation, slow Bay Area housing market?

Growing inflation and looming increases in mortgage interest rates could start slowing the runaway Bay Area housing market.

Real estate experts and economists say the steep rise in prices is likely to level off in coming months as interest rates tick up from historically low levels and inflation worries send jitters through the market.

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

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

For now, sales are turning quickly and prices are climbing fast. A record-low shortage of Bay Area homes for sale, booming demand for more suburban work and family space, and a strong local economy have pushed home prices up nearly 20% year-over-year.

Cupertino agent Ramesh Rao said Silicon Valley buyers have started to adjust their purchasing strategies in light of higher interest rates. 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 an additional $1,000 a month.

“At the end of the day,” he said, “everybody has a limited amount of cash coming in on a monthly basis.”

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

The March sales largely reflect a buyer’s decision to purchase in February, Wei said. He expects the impacts of rising inflation and rates to become more pronounced in the coming months. CAR economists are forecasting slower price growth in the second half of 2022. “Prices probably won’t rise as fast,” he said.

The Federal Reserve has indicated more rate hikes are on the horizon, largely to control inflation. Bay Area consumer prices climbed 5.2% in February on an annualized basis, the highest year-over-year jump since June 2001, according 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 are up 37% from last March, while the San Jose metro has seen costs climb 42%, assuming a 20% down payment on a single-family home.

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