The Effects of Higher Rates on South Bay Real Estate

By July 9, 2013Uncategorized

On Friday, July 5th, mortgage markets reached another multi-year high for 30-year-fixed mortgages. This recent series of dramatic rises in mortgage rates will affect the market in numerous ways. Of course, mortgage applications will decline and refinancing is slowing down as rates rise, but the affordability of homes is also very different when interest rates go up even one full percent point.

It’s no secret that the reason that home values have been steadily increasing in the South Bay for the last year was the incredibly low rates available to those looking for a mortgage, and a low supply of available homes, which drove up demand. A shift in the rates will change the number of people buying and the type of home they will be able to afford. Even though in the South bay we have quite a few investors (many who pay with cash), they make up roughly 30% of the real estate market as a whole, leaving 70% of buyers in a position to either buy less house, or have a higher monthly mortgage payment, as a result of the recent rise. In fact, buyers will have to buy homes that cost about 15% less than when rates were at 3.5% to have the same monthly payment. Higher rates will also cause investors with loans to invest in other projects.

In the next few months, the impact of rising rates will be felt in the south bay real estate market but probably not as much as other areas of the country. There is an old saying in real estate that pertains to areas like ours: “first to recover, last to be affected.” While higher rates increase payments or cause buyers to bring larger down payments to closing, there is still a lack of inventory and when there is a lack of inventory there is still high demand. We may see home buyers lowering their price range, and we may see 2 or 3 offers on homes rather than 5 or 6 like in the past. That doesn’t change the fact that rates are still very affordable and the South Bay is a great place to live and own a home.