What spiking mortgage interest rates mean for California North Coast housing markets

Ever-rising mortgage rates, spurred upward in part by the Federal Reserve's effort to curb inflation, means uncertainty and a market flux that may take months to resolve, experts tell the North Bay Business Journal.

And the Fed is likely not done raising interest rates.

“They probably won’t be as aggressive, but right now I think there's still a little bit more to grow in the upcoming months,” said Oscar Wei, deputy chief economist with the California Association of Realtors. “My assessment is that by the end of the year, we'll probably see somewhere closer to a 6.5% 30-year fixed mortgage rate.”

As of Sept. 14, California mortgage and refinance rates were 6.28% for a new 30-year fixed loan and 5.58% for a 15-year fixed loan, according to Bankrate. The home mortgage rate is more than double from a year ago and the highest in 14 years. At the same time, nationally, new home sales fell in July to a 6-1/2-year low, while home resales and single-family housing starts hit two-year lows, according to a Sept. 14 report from Reuters. Housing prices, however, also remain high because of a shortage of affordable homes, so a housing market collapse is unlikely, according to the report.

The national average for a 30-year fixed-rate mortgage — the most popular home loan product — soared to 6.02 percent this week, nearly double what it was nine months ago, according to data released Thursday by Freddie Mac, the Washington Post reported. It has not been this high since November 2008.

Wei also said he thinks inflation will be controlled next year but not before the end of the second quarter, so that may put the 30-year fixed mortgage rate even higher before it begins to slow down.

Could the mortgage rate go as high as 7%?

“I think it’s possible it may go up briefly, and then start coming down, probably in the late second quarter or third quarter,” Wei said. “So, at the end of next year, we probably won't see 7%. We’ll probably see 6% or maybe below 6%. But it all depends on inflation.”

The current mortgage rate may seem even more stark considering the rates had dropped as low as 2.5% over the last couple of years, noted Zillow spokesman Matt Kreamer.

“During the pandemic, home prices just kept shooting up because of all this competition for not very many homes, but people were managing it because interest rates were so low,” Kreamer said. “But once interest rates started coming up in the spring, that put the brakes on what’s happening now.”

Now, for example, if a homebuyer puts 20% down on a $1 million home at a 6% interest rate versus 3% a year ago, that means an additional $1,400 to the monthly payment. And a $1 million home is not uncommon in the North Bay, Kreamer noted.

“I think people think about interest rates moving, but they don't really think about the actual dollar value of what it means,” Kreamer said. “It was already more or less unsustainable for home values to grow as fast as they did, but when the interest rates pile on top of that, it's just completely unsustainable.”

Now, as demand has fallen, so have the prices of homes.

In the North Bay as of Aug. 31, the share of listings with a price cut in Napa County was 21.2%, up from 16.6% a year before; in Marin County, 21.4%, up from 13%; and in Sonoma County, 24.1%, up from 17.4%, according to Zillow.

Jeremy King, a Petaluma-based realtor affiliated with Coldwell Banker, noted there are more reasons for the drop in demand than spiking interest rates.

“It’s a combination of different things … the economy in general, the stock market, uncertainty about what’s going between Russia and Ukraine — people just have a lot of worry,” King told The Press Democrat in a Sept. 15 story.

While these reasons have slowed King’s business, it hasn’t stopped it. On Sept. 15, he was writing an offer on behalf of clients bidding $190,000 over the asking price of a house in Petaluma, with zero contingencies. He was preparing another offer for different buyers bidding $250,000 over asking price on another property, although that property was “dramatically underpriced,” the outlet reported.

Where it was common for a home to get “eight, 10, 12 offers,” just six months ago, “now we’re typically seeing one to three,” King said.

Affordability is worrisome for most homebuyers, and that’s especially the case right now for first-time homebuyers, said Wei.

“In the next few months or upcoming year, you will probably see a smaller share of first-time buyers because of their inability to pay a higher mortgage,” Wei said, “and because of their concern about whether they will be able to recoup because they have not racked up any housing equity.”

Housing affordability for repeat buyers is also of concern in the current market, but less so because they may be able to come up with a bigger down payment, considering the equity they have gained in the last couple of years, Wei said.

And when repeat buyers want to sell, they have to think about whether they want to trade up to a higher interest rate, Wei said.

“Many of them were lucky to get 3% or below 3% interest rates, so even if they have the money, they may not necessarily want to trade up because it's just not a very good feeling,” he said. “So, some repeat buyers may hold back and that could actually affect the supply side.”

This story has been updated with reporting from Press Democrat Staff Writer Austin Murphy.