Impact of rising interest rates in Silicon Valley.

California’s Housing Affordability Index (HAI) for Q3 2015 was recently released.  Compared to last Quarter, housing prices dropped, however, the rise of interest rates had offset the any potential savings from the lower prices.  The Affordability Index remained the same for both Santa Clara and San Mateo Counties as Q2 2015. 

In Santa Clara and San Mateo Counties, less than 1 in 5 Californians could afford to purchase the median priced homes in these respective counties.  Think about that number.   The Affordability Index is a huge psychological hurdle for most homebuyers.  

The Data

In Santa Clara County, the median home price was $965,000, the mortgage payment was $4,870 and the income needed to purchase such a home was $194,720 in Q3 2015.  Only 19% of Californians could afford to purchase the median priced home in Santa Clara County.  

Chart 1  (Q3 15)                          HAI

In Q2 of 2015, the median price was higher at $980,000, however, the same 19% of Californians could afford to purchase the median home, because of rising interest rates.   By comparison, in Q3 of 2014, 21% could afford to purchase the median priced home in here. 

Chart 2 (Q2 15)             

                                                              HAI

Chart 3                                                 Q3 15                Q2  15                      Q3  14

In San Mateo County, the median home price was $1,250,000 with the requisite mortgage payment being $6,310 with the income of $252,230 to purchase there.  Only 13% of Califorians could afford to purchase in San Mateo County in Q3 of 2015.

See Chart 1

In Q2 of this year, the median price was $1,300,000 but again the same 13% of Californians could afford to purchase the median priced home due to rise in interest rates.  And in Q3 of 2014, 15% of Californians could afford to purchase a median priced home in San Mateo County.

See Chart 2 and Chart 3

Concerns

As the numbers reveal, more than 80% of Californians cannot afford to purchase in either of these two Counties. This is a huge psychological barrier for many home buyers, especially for first time buyers, causing some to drop out of the marketplace as they see these numbers. 

Currently consumers are concerned about the fear of a rise in interest rate when the Fed raises its discount rate.  People don’t consider the impact of their ability to purchase with the changing  rates, but Q3 has demonstrated the impact of the rise in rates - that was just in anticipation of a rise as the Fed has yet to make a move.  If you are a  buyer thinking of buying a home, locking in lower interest rates is equally important as a drop in home prices.