Synopsis on mortgage interest rate vs affordability

Real Estate Agent with (408) 425-1601 CA bre 1519182

                                                                          Sam Shueh

                                                    Realty One Group

                                                       Campbell, CA


The Feds finally made up their mind on lending interest rates. With a stronger economy and more job growth it announced an interest hike for the first time in months. Higher interest rates is goodness for financial industry and curb inflation. The low cost of fuel artificially lowered the inflation but it will not remain low when other conditions change. Government toyed with printing paper currency with no gold reserve and make money more available to encourage people to buy homes. 

I went to several major lenders and they already jumped on the bandwagon even before the December announcement having mortgage interest rates around 85 basis points higher and start charging points for some products. 

This study focuses on different loan programs popular in Silicon Valley, CA. 

Conforming loan (PITI-Santa Clara County, CA) vs required gross income 

For a conforming purchase loan of $417,000 for a 30 year fixed rate with 20% down $521.25K purchase price

The monthly mortgage(PITI) with no HOA due and annual income required is:

- 3.8%  $2,540                $78K-with an assumed 10K debt  2015

- 4.3%  $2,665                $81K                                                    2016 Nov

- 4.8%  $2,785                $85K                                                    2017 Mid year

- 5.3%  $2,925                $88K                                                    2018?


For each percent of interest increase there is about 10% of monthly payment increase. This first rate change in a long time one will pay almost 10% more on borrower payment on each payment.  

Needless to say the $417K conforming loan limit barely gets borrower a two-bed room condo in Silicon Valley where there is another ~$400 HOA fee on top of the mortgage payments(PITI).  

Realistically, in Silicon Valley a $1.3 million dollar home often is a remodeled 3-4 br, 2 bath, 40 year old tract 1,300-1,999 sf  home on a 5000+ sf lot.  Many buyers often put a larger down payment in order to keep their mortgage payment manageable. 


For a $1,000,000 mortgage for a 30 year fixed rate jumbo mortgage, the monthly mortgage (PITI) and minimum required annual income needed is:

- 4.15%     $6,498                $193K -with an assumed 20K debt  2015

- 4.65%     $6,781                $201K                                                     2016 Nov 

- 5.15%     $7,085                $209K                                                     2017 Mid year

- 5.65 %    $7,400                $217K                                                     2018?


For each 1% in interest rate increase it translates into ~10% increase in monthly mortgage payment. To keep same mortgage payment the housing price needs to be 10% lower during each rate change.  


It is likely our mortgage interest may increase 2% in the foreseen future. Home prices then needs to be lower by 20%. Local wage increases is probably about 3.5% annually while local housing can absorb a 6.5% price decrease.  This steep increase in housing cost has encouraged a generation of high tech workers to become job hoppers bouncing from one company to another since there is no longer a pension favoring longevity or loyalty. People are trying to increase their income to a higher level in order to maintain a balanced quality life.  


Housing price is highly proportional to demand and supply and is tied to available jobs. State it differently, the unemployment rate is the single most influential factor affecting home prices. Those with no appreciable income the demand for housing is sluggish thus home prices will fall.    


Below illustrates a historical chart on unemployment from 1996 to today. The top line is US average jobless rate(beige color), mid-faint line is California unemployment rate in blue for City of San Jose, CA where many high technology companies in Silicon Valley are located. During the dot com(first shaded) and Great Recession(right shaded years) the City experienced high unemployment.  During the Great Recession did not hit the area hard as high tech giants like Google, and Apple were doing a thriving business. Only the service industry was greatly affected.  Today, at onlty 3.9 % in metropolitan Silicon Valley area it enjoys a relatively higher employment. 


San Jose, California monthly unemployment rate chart

                          Unemployment Rate -US, California and San Jose City (1996-2012)


The unemployment rate chart can be deceiving. Not every household is making $193,000 annually eligible for a $1,000,000 mortgage. In fact, Santa Clara County which has the highest household income in the nation has a median income of just $100,000.  This means only dual-income high skilled couples are eligible for a $1,000,000 mortgage while leaving out many others hopeful home owners. I have physicians who are shocked they do not make enough for the local housing.


Let's learn from the past and predict future-


A city as large as a San Jose, CA consists of many neighborhoods. As a young city matures the neighborhood influence is more homogeneous.  Unlike other metropolitan areas there are no ghetto neighborhoods. As a technology center there is a little bit of everything in each neighborhoods, income, even school quality seems to be less divergent.  Some neighborhoods may have higher crime incidents (nothing serious) than others. Yet the home price is just as pricey in that area.  


Below is a tabulation of SFH prices in Silicon Valley with data going back 14 years.  They consist of SFH 3br+ from 1,300 to 2,000 sf only.  Age seems to have little effect on home values as the City is relatively new and most have modern updates like newer kitchen, bath and hardwood or tile flooring. The City experienced a 33.5% price erosion between 2007-2009, Should one purchased a typical home at the end of 2010-trough value he gained 7.2% during the next year.  By 2015 he would have gained +72.8% at the end of 2015 and gained another +5.7% during 2016.


Year     San Jose City   1300-2000sf- SFH
2002 $515,115  
2003 $526,969  
2004     $595,914  
2005 $705,851  
2006 $740,038  
2007 $754,189    Baseline-peak year
2008 $597,236  
2009 $501,431 66.5% of baseline
2010 $537,658 107.2% of trough value
2011 $512,972 102.3%
2012 $564,182 112.5%
2013 $692,610 138.1%
2014 $770,386 153.6%
2015 $866,250 172.8%
2016 $915,826 182.6%


Below is another neighborhood close to high technology center with similar style home constructions as the rest. While the location close to work seems to suggest higher  home prices. School test scores are exceptionally high. Many students are shown on TV as spell bees and high school grads mostly attend four year universities. The household income is 34% over the rest of San Jose metropolitan. In 2007 the average home price was over $1 million dollars. During the Great Recession few residents lost their jobs because big employers like Apple and Google had no layoffs to speak of.  It experienced a -12.2% price drop vs. -33.5% (San Jose City). If one bought at trough-bottom price year the percentage of gain attained during 2015 suggests a +76.5% good neighborhood gain while the rest of San Jose has gained more at +82.6%. In fact, it reaffirmed home prices reached a plateau one year ago ( 2015) hinting affordability was already an issue.  


Primary Year Sale Price       1300-2000 sf sfh 
2002 $686,075  TOP SCHOOLs
2003 $689,101  Close to hi tech employers
2004 $769,518  
2005 $884,541  
2006 $934,806  
2007 $1,013,077 baseline- peak $
2008 $1,003,061  
2009 $889,706  87.82% of 2007- trough
2010 $923,234  103.77%
2011 $899,103  101.06%
2012 $989,135  111.18%
2013 $1,169,271  131.42%
2014 $1,366,612  153.60%
2015 $1,566,678  176.09%
2016 $1,570,988  176.57%


Do you expect this to happen in the Silicon Valley housing Market? 


I have studied home prices for several years. During a price rise some neighborhoods recover slightly faster than others but the regional trend remains the same.


East San Jose is worth studying since there are more investment properties. There was an awful lot of foreclosures brought the home prices way down. As much as -45.9% home price erosion was experienced during the disastrous year of 2009.  However, the rebound rate is impressive. Many were bought by cash investors and that equity build growth helped a lot.  This is one of the few neighborhood homes are still appreciating at faster rate than most expensive neighborhoods!


 Year   East San Jose  SFH 1300-2000 sf
2002 $452,659  
2003 $466,329  
2004 $526,087  
2005 $632,257  
2006 $687,182 2006 yr -peak
2007 $676,051  
2008 $423,796  
2009 $357,953 52.1%-trough year
2010 $369,756 103.3% 
2011 $365,830 102.4%
2012 $402,113 112.3%
2013 $498,411 139.2%
2014 $574,602 160.5%
2015 $644,608 180.1%
2016 $674,268 188.4%


What so these numbers tell me about the  Silicon Valley Real Estate?


The answer is one is opt to make a purchase when they are ready and able.Wait for price to drop may be disappointing many as home prices were always stellar in this part of the country. To time the market is beneficial to investors who would like to buy low and sell at peak.


If you are planning on buying in neighborhoods that experienced greater price erosion. One can expect higher return (%) and one can pay off mortgage sooner.  However, the neighborhood could expect another price dip when the recession returns.


If  local major employers like Apple, Google, Tesla, Facebook are having head count issues it is conceivable the local housing in nearby neighborhoods will see a price erosion.  A 1% interest rate will wipe out 10% home price value assuming there are no salary increase.


Should you have questions about buying or selling homes please feel free to contact your local Silicon Valley Real estate expert.



Shueh, Sam  How is my Silicon Valley home worth? (Silicon Valley Home Values

Silicon Valley Real Estate July 2016 (San Jose area real estate update

Shueh, Sam    (Real EstateBlogs

Shueh, Sam    (My Website)  


Sam Shueh Realtor    

 I've called San Francisco South Bay home for over 30 years. We love this area and all it has to offer, and I enjoy sharing what I know about homes.  I documented in several books about Silicon Valley history. I have much expertise in real estate...please give me a call.                 (Four-O-Eight)  425-1601


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Diana Zaccaro
Veterans Realty of Brevard - NOT just for Veterans! - Cocoa Beach, FL
Your Brevard County, Florida coastal connection!

Sam, Great post with lots of good information. I have bookmarked for future the format.

Merry Christmas!


Dec 23, 2016 07:49 PM #1
Jane Peters
Home Jane Realty - Los Angeles, CA
Connecting you to the L.A. real estate market

Very informative, Sam. Let's home that prices stabilize or we are going to be looking at an extremely stagnant market in 2017.

Dec 26, 2016 12:42 PM #2
Sam Shueh
(408) 425-1601 - San Jose, CA
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Jane Peters 

The investors and few experts are telling me my view is too pessimistic and the demand and lack of inventory will bring another plateau of home price increase this spring.   The supply will come from new builds and people cashing out their equity going to cheaper places.

Dec 26, 2016 02:32 PM #3
Sam Shueh
(408) 425-1601 - San Jose, CA
mba, cdpe, reopro, pe

EAST PALP ALTO, CA is an example what economy and demographics changed concurrently

        Year         EPA     % 
2004 $615,000  
2006 $1,120,000  
2007 $542,000  
2008 $414,258  
2009 $321,778  
2010 $314,588  
2011 $309,012 27.6%
2012 $361,550 117.0%
2013 $464,405 150.3%
2014 $630,492 204.0%
2015 $697,697 225.8%
2016 $913,500 295.6%

The area was hit hard by the Great Recession. A 1200-2000 sf SFH on the avg dropped to 27.6% of peak year.  It did not regroup until 2012. At the end of 2016 it iws 2.95X if one bought it at the bottom. During 2016 year avg homes appreciated +30.9% (913.5/697.7K)!


Major employers like Google, Linkedin, Microsoft as well as Facebook have strong presence.  Across from the freeway is Palo Alto.  Few can afford to go live on otherside and east side gets better with more high tech employees start accepting EPA is just another place calling it home that is still affordable.  The demographics have changed to a great deal. It is highly unlikely that during the next downturn home prices will drop that much again.  At least Tesla, Linkedin, Microsoft, Google, Facebook dominate different industry. It appears to be a growing neighborhood and Zukerberg fundation is putting a lot of investment into medical and education in this neglected town.

Dec 29, 2016 05:32 PM #4
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