Bay Area home prices fall as mortgage rates spike. Could it last?

Bay Area home prices are falling as mortgage rates climb to their highest levels in more than two decades, squeezing many house-hunters out of the market and keeping would-be sellers on the fence.

The median price of existing single-family homes dropped 5.2% to $1.26 million across the region from June to July, according to the California Association of Realtors. The decline followed steady price gains most of the year as sales picked up during the traditionally busier spring and early summer home-buying seasons.

But now, spiking mortgage rates are slamming the brakes on an already challenged local real estate market. On Thursday, Freddie Mac reported the average rate for a typical 30-year fixed mortgage rose to 7.09%, up from 6.96% last week, reaching the highest peak since 2002.

“People are just not jumping into buying a home right now at these interest rates,” South Bay real estate agent Ramesh Rao said.

Meanwhile, a 30-year fixed “jumbo” home loan — which is common for more expensive houses — averaged 7.65% on Thursday, according to Bankrate.com. In the Bay Area, a jumbo loan is a mortgage that exceeds $1,089,200.

Mortgage rates have been on a sharp upward trajectory since last year when the Federal Reserve began raising the cost of borrowing to rein in inflation. Rates have more than doubled their recent sub-3% lows, in turn boosting monthly home payments for new mortgages by thousands of dollars and squashing a record-setting pandemic real estate boom.

In November, rates briefly topped 7% before falling to around 6% in February. They’ve been trending up again since.

Despite slowing inflation, Oscar Wei, an economist with the realtors association, said rates could reach as high as 7.5% in the coming weeks before dropping to around 6.5% by the end of the year.

That will likely put more downward pressure on home prices in the near term. And even if rates decline in the months ahead, fewer people typically look for homes during the second half of the year, meaning prices should continue to soften in line with seasonal trends.

“For buyers who are interested in buying in the fall and winter, there could be some opportunities because it might not be as competitive,” Wei said. “There may be a little more negotiation power for buyers.”

From June to July, median home prices dropped 8.5% in San Francisco to $1.46 million, 3.4% in Alameda County to $1.26 million, 3.2% in Contra Costa County to $900,000, 2.7% in San Mateo County to $1.98 million and 1.4% in Santa Clara County to $1.8 million.

For more than a year now, buyers who’ve been able to stomach the steeper rates have been left with few homes to choose from. That’s partly due to the Bay Area’s chronic housing shortage. But many homeowners who might otherwise be willing to sell have also been unwilling to give up the lower rates they locked in before the recent spike.

Sellers now putting houses up on the market are often doing so reluctantly.

“It’s definitely more so out of necessity, and they’re doing so unhappily because they have a direct comparison point to just a year and a half ago,” said Montana Gabrielle Hooks, an Oakland real estate agent.

Hooks said some of her clients have been forced to sell as their employers put an end to full-time remote work. One is stuck selling a recently purchased, spacious new-build in suburban Fairfield after being required to show up to the office in San Francisco.

“They would have never have purchased it if there was even a decent chance that they had to come back to the office so soon,” she said.