Predicting Tri-Valley real estate market conditions this spring means looking east — to Washington, D.C. Specifically, look at the actions of the Federal Reserve Board, more colloquially known as the “Fed.”
One tool available to the Fed to curb inflation is to increase interest rates. A side of effect of this practice is that mortgage interest rates typically also increase either in anticipation, or in response, to Fed policies.
Some housing economists say higher mortgage rates will drive buyers out of the market. Less demand may result in sellers dropping their prices — theoretically.
During the first quarter of 2022, mortgage interest rates have done exactly that. For the last few years, rates have been historically low in the 3%-4% range. By the time this article is published, rates could be approaching 6%.
Higher rates may directly impact the homebuying experience in Pleasanton in several ways.
“For a buyer purchasing a $1.5 million home, a 0.25% increase in the interest rate may not necessarily change their decision of whether they want to buy or not,” said Oscar Wei, deputy chief economist for the California Association of Realtors.
“It is going to add on to their financial responsibility and they are going to have to pay more, there’s no doubt. But for people buying in that price range typically they have a little bit more cushion in terms of whether they can handle a higher payment. They are not as stretched,” Wei added.
While sales prices in Pleasanton have hovered in the million-dollar range for several years, there are also buyers considering lower-priced homes.
Wei said that these buyers would feel the pinch from higher rates: “When interest rates started rising, they are going to get a hit a little bit more, they will be stretched a bit more.”
Wei, who has tracked real estate trends in California for more than 20 years, says buyer perception of where interest rates may go is just as important as the actual rates.
“Theoretically interest rates have an impact on demand, but it also depends on where the level of interest rate is,” Wei said. “Increasing from 5% to 6% or 6.5% is a sizable increase, but at the same time, it also depends on what people think interest rates are going to be at in six months or a year from now. If they actually believe interest rates will continue to rise, then they will lock in now. If they think rates are going to go down in a year, you may see demand actually softening.”
Speculating about the direction of interest rates and how that will impact a mortgage payment, should not distract from the elephant in the Pleasanton real estate market: historically high sales prices and the fundamental ability of buyers to afford homeownership.
“Nothing is impossible, you have to be prepared,” said Sheila Cunha, 2022 president of the Bay East Association of Realtors. “You have to go through the loan approval and underwriting process so that when you see the house you want, you’re ready to go.”
Cunha shared that adjusting expectations and leveraging non-financial resources is a strategy for buyers during 2022. “Buyers may not want to look for the perfect house but perhaps something that costs a bit less that they can put ‘sweat-equity’ into it,” Cunha said.
For sellers, while some buyers may be enthusiastic about purchasing a home as-is, a bit of prep could pay dividends.
“I always advise sellers to fix up their homes, do the best that they can and the most they can to make the new owner of your house ready for move in,” Cunha said. “Give it a little face lift, paint it, have it professionally cleaned, have the windows done, make it look like a house that if you were shopping for a home, you would want to live there.”
Editor’s note: David Stark is chief public affairs and communications officer for the Bay East Association of Realtors, based in Pleasanton.
