Market Update: Rate hikes, and what a more buyer-friendly market might mean for the Bay Area

Like many of you, we’re closely monitoring the real estate market. As of last Thursday, mortgage rates for a 30-year-fixed are averaging 7.37% according to Mortgage News Daily. Per Redfin, that means the typical homebuyer is dealing with steeply increased monthly mortgage payments—about 50% higher than when the mortgage rates were around 3%. This has chilled buyer demand for inventory, with more and more listings sitting on the market for longer than we have seen in the past 15+ years.

However, according to MarketWatch, there may be a silver lining in this: a more buyer-friendly market. Especially in the Bay Area, home-buying has been a tense experience with auction-like levels of bidding wars, frequently leaving first time homebuyers in the dust as their dream home’s asking price skyrockets out of their budget.

During the height of the pandemic between July 2020 and July 2021, the San Francisco-Oakland-Berkeley metro area had the third highest net negative migration in the United States, only passed by LA and New York, leading local news outlets to dub it the “Bay Area Exodus.”

So what does this silver living look like, exactly? First, it encourages more price drops, and fewer bidding wars. Homebuyers will have a little more breathing room to consider their options, without feeling as pressured to jump on whatever property they can get. Per Redfin (chart below), 7.9% of listings have had price drops recently.

Graphic via Redfin

The other good news? The slowdown is not indicative of a much-feared real estate bubble. UBS released its 7th annual Global Real Estate Bubble Index (below), and while all the U.S. markets analyzed—including the SF metro area—fell into the “overvalued” category, none were marked as at risk of a bubble. Real estate markets in Vancouver, Hong Kong, Toronto, and others were not so lucky.

To rip the band-aid off, let’s look at next year’s forecast: Looking ahead to the 2023 housing market, there is a likelihood of double digit mortgage rates. Christopher Whalen of Whalen Global Advisors noted that, “There is a lag effect in mortgages,” so that even if the Fed decides to pause additional rate hikes after their December meeting, the 30-year-fixed rate still would “easily touch 10% by February.”

This translates to a likely loss in the unusually high real estate gains (45% nationally) that happened during the pandemic. Slowing down an overheated market will also present opportunities for Bay Area buyers who have been challenged getting their offers considered. That is something, although not music to many homeowners’ ears.