With mortgage rates near 8%, October home purchases slow, but prices stay high

Bay Area home sales remained sluggish in October as the supply dwindled and high interest rates kept potential sellers from listing.

Sales of existing homes in California fell nearly 12% from last year, according to new data from the California Association of Realtors. That comes as interest rates hit a peak of 7.79% in the last week of October — the highest rate in two decades. Since then, rates have declined, but only modestly, to 7.44%.

Even with slowing sales, most buyers aren’t withdrawing from the market solely because of interest rates. Real estate agents say flagging sales reflect a lack of inventory more than waning buyer interest.

Jim Hamilton, president of the Silicon Valley Association of Realtors, said buyers “are getting accustomed to those higher interest rates.”

“It’s a pretty dramatic jump, but it didn’t happen overnight either,” Hamilton said. Since last year, the Federal Reserve has repeatedly raised its key interest rate in a bid to curb inflation, indirectly affecting everything from mortgages to credit cards.

After 14 months of decline, prices began moving up again in August. As of October, the median price of a home in the nine-county Bay Area was $1.27 million, a 5.7% increase from last October. In the nine-county Bay Area, San Mateo County had the highest median home price at $2.1 million, while Solano County had the lowest at $620,000.

Most sellers aren’t eager to give up existing mortgages and buy at rates two or three times higher than what they’re currently paying. With fewer homeowners moving and listing their homes, buyers are competing over a limited number of properties, putting upward pressure on prices, a trend that’s likely to continue through the holiday season, agents say.

“Sellers are still getting rewarded by a lack of inventory,” said Tim Allen Jr., an agent based in Walnut Creek.

More price-sensitive buyers may be putting their home search on pause. A rule of thumb among real estate agents: For every 1% increase in rates, buyers tend to lose 10% of their purchasing power. That means a buyer looking at a $1 million home in January of this year, when rates were 6.4%, might only be able to afford a home worth around $845,000 today.

“If there’s not a need for more space, or relocating based on work, then people are sitting tight and waiting to see what happens with rates,” said Kumi Hodge, a real estate agent based in the East Bay.

That’s bad news for certain neighborhoods in Oakland that had previously been considered affordable options for first-time buyers, including West Oakland and Jack London Square, said Andrea Chopp, a listing specialist with online brokerage Redfin. Now, with higher rates, she’s seen demand in those areas dwindle and houses sit on the market for days, while well-established neighborhoods like Rockridge and Montclair still attract multiple offers.

“Rates have pushed that younger demographic out of the market a bit,” Chopp said. That’s true nationally, too: data from the National Association of Realtors found that first-time buyers were a median age of 35 in 2023 — up from 31 in 2013 and 29 in 1981.

Some buyers are stretching themselves to the their budgets’ limit, maintaining faith that they can refinance in the next several years.

“They’re gambling on the rates coming down,” Hodge said. But if rates don’t slide as financial analysts predict they will by the end of 2024, those buyers will be saddled with high monthly payments.

“In a pinch, could you stay in the home you’re buying for five to seven years?” is the question Brady Thomas, a mortgage broker with La Salle in Oakland, asks his clients. “That takes the pressure off trying to time the market — because that’s really difficult.”

Some buyers are taking advantage of creative financing tools like interest-rate buy-downs, which can help make monthly mortgage payments more manageable. With temporary buy-downs, buyers get a lower rate in the first year that gradually increases — generally over a three-year period — until it climbs back up to rates closer to market conditions at the time the loan closed.

“The hope is that within those three years, the rate will come down,” Allen said. “If buyers can stomach that risk, the advantage is that you don’t have the same competition for homes that we’re used to in the Bay Area.”

Landsea Homes, a Dallas-based builder, has begun offering buy-downs for some of the new townhouses it has on offer near the Alameda Marina. Already, it’s seen traffic of prospective buyers increase by 30%, said Josh Santos, president of Landsea’s Northern California division.

“For the prospective buyers that we work with, the biggest hurdle is the uncertainty in the marketplace,” Santos said. “The buy down is getting folks re-engaged in the market.”

If rates continue to fall as they have the last three weeks, we could see sales start to pick up again by December, said Oscar Wei, an economist with the state real estate agents group. Already, the Mortgage Bankers Association noted a 2.8% uptick in applications nationally between the first and second weeks of November.

“We expect a better 2024, and we do expect that rates are going to come down,” Wei said. “The question is: By how much?”