Rising mortgage rates put homes out of reach
As Bay Area residents continue to see inflation at the gas pump and checkout registers, the price of buying a home is also going up, even as demand is starting to cool. And with mortgage rates also rising, what home buyers could have afforded just six months ago may now be out of reach.
According to a new report from real estate listings site Zillow, rising rates have had a particularly dramatic impact in the pricey Bay Area, with average monthly mortgage payments more than 50% higher than what they were just one year ago.
“Home prices in the Bay Area have shot up since the pandemic, but historically low mortgage rates have kept monthly payments somewhat affordable,” said Matt Kreamer, data spokesperson for Zillow, in an email. “Now that rates are ballooning, more and more people are being priced out.”
According to Zillow data, the monthly mortgage payment for a typical home in the San Francisco metro area was $8,117 as of June 16. That is a 41% increase from Dec. 31, 2021, when it was $5,765, and a 53% jump from June 30, 2021. The mortgage payment calculations include the rise in interest rates each month, and the rise in the typical home value for that month.
The metro area is defined as Alameda, Contra Costa, Marin, San Mateo and San Francisco counties.
In the San Jose metro area, defined as Santa Clara and San Benito counties, the monthly mortgage payment for a typical home in the area was $9,136 as of June 16. That's a 44% bump from Dec. 31, 2021, and a 57% year-over-year increase.
Kreamer said much of this recent surge in monthly mortgage payments is due to interest rates. In the past two years, mortgage rates plunged and the 30-year fixed-rate mortgage hit a record low of 2.65% in January 2021.
“Those incredibly low rates were offsetting a lot of the sudden surge in home prices, and now they're not,” he said.
The average 30-year fixed-rate mortgage as of Tuesday is 6%, according to Bankrate.
For a “typical” San Francisco-area home that sells at $1.5 million with a 20% down payment, moving from a 3% to 6% mortgage rate translates into a difference of $2,100 a month.
To offset that, many home buyers will need to look for homes at lower price points. A home buyer looking to still pay what was the average monthly mortgage payment back in January (about $5,700) would need to chop as much as $450,000 off their home's sale price to get that same monthly payment now, according to Bankrate's mortgage calculator.
“The impact that rates have on monthly costs of buying a home are huge,” Kreamer said. “What that means for the market is that homes will take longer to sell.” On the positive side, that should give some buyers more time to compare and consider homes.
Another benefit to buyers is it could lead to more price cuts, following a stretch where sellers could list at whatever
price they wanted to and often fetched far more.
“A month ago, just 5.8% of Bay Area listings had seen a price cut, and now that's up to 8.3%,” Kreamer said. “Expect that trend to continue, and expect the rate of price appreciation to slow significantly.”
At the same time, home affordability has continued to worsen in the Bay Area, particularly since the start of 2022.
According to the Atlanta Federal Reserve's Home Ownership Affordability Monitor, the San Francisco metro area is ranked second to last out of areas with more than 500,000 residents, scoring 41.5 as of March 2022. The lower the number, the more unaffordable the area is deemed, with scores below 100 considered unaffordable.
To afford a medianprice home of $1.26 million in the San Francisco metro area, 72% of the region's median income of $118,740 would need to go to the mortgage, according to data last updated on May 13.
Drilling down to Bay Area counties shows Marin is the most unaffordable locally, with a score of 38, followed by San Francisco at 44 and San Mateo at 47. Alameda County has a score of 50 and Contra Costa County has the highest score, so is ranked most affordable among the counties, at 65.8.
So what does this mean for potential Bay Area home buyers? Kreamer said it's “a bit of a mixed bag,” because on one hand, they have more options and more time to look for the right home.
“Price growth is going to slow down as sellers start to confront what buyers will actually be able to pay for their house,” he said. “And they're likely to see fewer bidding wars that have defined the past two years.”
But at the same time, it's hard to predict whether rates will plummet again, and monthly mortgage payments are soaring, which “has likely priced many prospective buyers out of the market already.”
“Those incredibly low rates were offsetting a lot of the sudden surge in home prices, and now they’re not.” Matt Kreamer, data spokesperson for Zillow