Fluctuating interest rates

By John M. Lee

Since writing about mortgage interest rates rising from 3% to 4.5% a few months ago and how that translates to the amount of real estate a buyer can buy, I got a lot of questions about what it looks like now that the interest rate is around 6.5-7%.

We did a bit of math with a hypothetical buyer at these parameters. At the beginning of the year, he buys a house for $2 million with a down payment of 30% or $600,000 and a loan of $1.4 million. With a 30-year mortgage at 3%, the monthly payment is about $5,900. Most people strive to buy a home, so let’s assume that’s all the buyer can afford.

If we also assume that the $600,000 was in the stock market and 25% of that was lost, the down payment becomes $450,000. Since the interest rate is no longer at 3%; at an interest rate of 4.5% and a payment of approximately $5,900, the buyer can only qualify for a mortgage of $1.2 million. This means that this buyer can only buy a $1.65 million home, down from $2 million previously, a 17.5% drop.

Fast forward to today and watch the same scenario at a 6.5% interest rate. With a payment of $5,900, the buyer can qualify for a loan of $950,000. Add that to the reduced down payment of $450,000 and that means the buyer can only buy a $1.4 million home, a 30% decrease! If the buyer had liquidated his stock portfolio in preparation for the purchase and kept his down payment of $600,000, he can buy a house for $1.55 million, still a 22.5% drop in power. ‘purchase.

So if we live in a simple, perfect world where math dictates the outcome, we should see prices fall by 22.5% to 30%. However, real estate is complicated and other factors come into play.

What we will see, and are currently seeing, is a decline in sales as buyers and sellers adjust to this new market environment. Having experienced this type of market three times in my career, here is what I believe will happen in the next few years.

At higher interest rates, buyers start looking for other options for their loans. Adjustable rate mortgages are making a comeback. They could ask their parents or loved ones for additional help with the down payment to reduce the monthly payment.

The number of sales will decrease as some buyers are shut out of the market. Homeowners with equity in their homes may choose not to sell properties at these lower prices and wait until the next bull cycle before selling. Homeowners who have purchased or refinanced a home in recent years now own properties at much lower interest rates and will not move unless they face a major lifestyle change.

Also, after the 2008 financial crisis, lenders tightened their underwriting guidelines and most people who bought properties after that time needed larger down payments and had more equity in their homes. They will not be forced to sell like during the last crisis.

These factors will all help to limit the number of price drops in our market. Remember we are a small seven mile by seven mile metropolitan area that is pretty much completely built up. And, despite the problems we have as a city, San Francisco is still a great place to live.

Zillow reported in mid-October that San Francisco Bay Area home prices fell 3% from May to August of this year. The number will be larger in the next data release, as Zillow does not have the latest sales figures. Will the price drop 22.5-30%? I believe interest rates are about to top out and that 22.5-30% will be a theoretical maximum and I don’t believe our market will go down that far.

Our real estate market lags the stock market and is known as a lagging market indicator. Some people think the stock market has bottomed out and the federal government’s interest rate hike may be slowing down. If this is the case, the real estate market will drop a little more from this point before flattening out.

I hope these thoughts will help you if you are considering buying or selling real estate.

And one last thing: there is an important election on November 8 that will affect us all. Feel free to vote if you haven’t already!

John M. Lee is a broker with Compass specializing in the Richmond and Sunset districts. If you have any real estate questions, call him at 415-465-0505 or email [email protected]

Richmond Homes Sold in October*
Address Bed Bath Square ft. Price
706 25th ave. 3 2 1,442 $1,020,000
670 26th Ave. 3 2.50 2,526 1,400,000
890 37th ave. 2 1 1,675 1.5 million
723 41st ave. 5 3 2,485 1,700,000
543 35th ave. 4 4 2,400 2,250,000
134 26th ave. 2 2 1,610 2,300,000
507 Ninth Ave. 4 3 2,395 3,400,000
*Partial list. Source: MLS
Sunset homes sold in October*
Address Bed Bath Square ft. Price
1707 27th Ave. 2 1 1,368 $1,230,000
1210 40th ave. 2 1 1,225 1,270,000
1862 40th ave. 2 1 911 1,351,000
2445 21st Ave. 3 1 1,075 1,370,000
1638 25th ave. 2 2.50 1,585 1,480,000
1735 21st Ave. 3 2 1,745 1,570,000
1722 21st Ave. 4 3 2,200 1,700,000
1419 33rd Ave. 2 2.50 1,973 1,775,000
1874 41st Ave. 3 2 1,750 1,788,000
1543 40th ave. 3 1.50 1,350 1,840,000
2348 Funston Ave. 3 2 2,070 2,100,000
2635 15th ave. 3 2 1997 2,200,000
2058 12th ave. 4 4 2,962 3,000,000