The price of homes in the Bay Area rose 25% or more in the last year. So how does one cope with the rising tide of home values? For that, we offer you a new way of looking at the circumstances.
When gas prices shot up close to $5.00 per gallon a few years back, a friend of mine was waxing on about how much more it now cost him to put gas in his car. He was puzzled when I told him I wasn’t spending any more at the pump than before. “Why not?” he exclaimed. I told him it was simple, when I arrive at the gas station I pump $50.00 of gas into my car, whatever the price of gas—so it never costs me more than $50.00 at any visit to the gas station.
While at first this may appear to be lacking in the critical thinking department, the only real dilemma is that of course with less gas in your tank, one can’t drive as far.
We bring this up because our local real estate market will soon be suffering the same fate. Buyers will be forced to decide if they are willing to pay more for the same home, or settle for less home to keep their payment the same.
Why Higher Interest Rates May Change the Landscape--The Wall Street Journal reported on Friday that Wells Fargo—the nation’s largest market for refinancing and purchase mortgage loans—was cutting its staff by another 2,300 jobs nationwide. The reason? Wells Fargo owned 30% of the mortgage market until recently when the bank's market share dropped this quarter to 23% of mortgage originations, according to Inside Mortgage Finance.
Refinance as a percentage of mortgage applications were 54% in the second quarter, down from 69% in the year earlier period—and Wells Fargo is assuming it will get worse. So if the nation’s largest mortgage lending institution is betting that refinances will continue to wane due to an inevitable rise in interest rates, it begs the issue to consider the impact this will have on our local market.
Buyers have enjoyed relatively inexpensive purchase money loans enabling them to afford more home and rationalize bidding thousands of dollars over the seller’s asking price. But with home prices rising 26% in the Bay Area year-over year, buyers have already had to make a choice between paying on average 26% more for the same home they could have bought a year earlier, or settling for a home 26% smaller.
This summer, interest rates are already over 1% more than where they were a year ago; and we expect they will continue to rise. Buyers will either learn to set their expectations lower, or pay more to remain competitive.
If you own a home and have been considering a move, you may have been reluctant to sell when values appear to be rising at an exponential rate. But the days of double digit appreciation may already be waning. Conditions are very favorable for selling your home today, but whether or not they will remain so, or get better or worse, is a guess at best. It is yet to be determined how rising rates could alter the glorious real estate landscape sellers have enjoyed over the last year. If high demand continues along with low inventory levels, it might be possible for multiple offers to remain a norm with over asking bids. But if the higher median home prices have created more enough equity sellers, and inventory increases as demand diminishes—a direct result of challenging affordability with higher rates and prices—many seller’s may have wished they took advantage of the perfect storm in 2013.
Drew & Christine Morgan are REALTORS/NOTARY PUBLIC in Belmont, CA with RE/MAX Star Properties. with more than 20 years’ experience in helping sellers and buyers in their community. They may be reached at (650) 508.1441.
The information contained in this article is educational and intended for informational purposes only. It does not constitute real estate, tax or legal advice, nor does it substitute for advice specific to your situation. Always consult an appropriate professional familiar with your scenario.