Will mortgage rates keep going up?

Thinking of jumping into the Bay Area home market? Beware: Mortgage rates have been on the rise again in recent months — and are threatening to top 7% before the end of the year.

As a result, steeper home loan payments continue squeezing out many house hunters. But growing demand from those who can still afford to buy — combined with a lack of properties coming up for sale during the traditionally busier summer months — is stoking competition, pushing the Bay Area’s typical single-family home price above $1.3 million.

Despite the higher rates, which began to surge last year from historic sub-3% lows, buyers are now “biting the bullet” and moving forward with home purchases, said Matt Rubenstein, a real estate agent in Contra Costa County.

Home seekers who had been holding out for rates to drop are accepting the increased borrowing costs just in time for the summer homebuying season. It signals something of a return to normalcy following a pandemic real estate boom that sent prices soaring to all-time highs and rate hikes that then brought them back to Earth.

“There’s a seasonal trend that we just didn’t see the last couple of years,” Rubenstein said.

The Bay Area’s $1.3 million existing median home price in June represented a 1.8% bump from May, according to the California Association of Realtors. It was the fifth straight month of price gains, but a 2.7% drop from June 2022.

At the county level, prices from May to June increased 4.7% to $930,000 in Contra Costa, 3.6% to $1.3 million in Alameda County, and 2.1% to $1.8 million in Santa Clara County. San Mateo County saw a 1.7% dip to $2 million, while the median price in San Francisco fell 3.6% to $1.6 million.

While the average rate for a typical 30-year fixed home loan declined slightly last week to 6.8%, rates had since April been trending toward 7% after falling to around 6% this winter, according to Freddie Mac.

The average 30-year fixed nonconforming home loan, meanwhile, rose to 7.2% on Thursday, according to Bankrate.com. In the Bay Area, a nonconforming loan, also known as a “jumbo” loan, is a mortgage that exceeds $1,089,300 for a single-family home.

The Federal Reserve is expected to raise the economy’s benchmark interest rate at least twice more this year in its fight against inflation, likely sending mortgage rates well above 7% in the months ahead, said Jordan Levine, chief economist with the realtors association. For most of the 1980s, rates had been above 10% before dropping to single digits in the following decades. They hadn’t hit recent levels since 2007, before the Great Recession.

Still, Levine doesn’t expect the higher rates to take a big chunk out of Bay Area home prices. “Even as demand has fallen, it’s still outstripping supply, and that’s still the relevant dynamic,” he said.

The region’s chronic housing shortage is largely to blame. But mortgage rates are also playing a role in the lack of supply.

That’s because many homeowners who might otherwise be willing to sell had already locked in home loans before rates started to spike in early 2022 as the Fed began raising the cost of borrowing. Those potential sellers are now reluctant to give up their cheaper rates.

Aparajita Tyagi and Ankit Bajpai, both 33, are struggling to find a second home in Berkeley now that fewer properties are on the market. The couple recently bought a house in the city and are currently looking for a place nearby for their parents to stay when visiting from India.

“We’re seeing a lot of bidding wars, but we don’t want to engage in those,” Tyagi, a tech attorney, said. “We’re fine with taking it slow since we don’t have the kind of pressure to quickly close a deal like when we were buying our first home. We can take our time to find the right fit.”

“We’re hopeful that the interest rates will come down,” said Bajpai, a marketing consultant. “I think that’s the hope that everyone else has as well. Because if it remains at what it is, financially, it won’t make any sense.”

That’s unlikely to happen soon, but there is good news for buyers struggling to finance a home.