David Stark, the chief public affairs officer for the Bay East Association of Realtors, confirmed that to the Pleasanton Men’s Club at its Tuesday meeting.
Stark spoke about two major factors that have put a brake on what had been a red hot market since sales resumed after being halted during the early months of the pandemic lockdown.
The first is interest rates that have soared from around 3% for a 30-year fixed rate mortgage to more than 6% this week. The Federal Reserve is driving that as it has finally started to react to the soaring inflation rate by raising its base interest rate from zero. Given this week’s ugly inflation number, particularly at the wholesale level, the Fed may be even more aggressive than its back-to-back ¾% increases and raise the rate by a full point.
The state Realtors board put together a graph showing the impact on a $900,000 home with a 20% down payment. You can add 40% to $1.5 million for the average sale in Pleasanton. The monthly mortgage at 3% requires a monthly payment of $4,071 compared to $5,352 at 6%-- nearly $1,300 or about 30% more per month.
Looking at it from a purchasing power standpoint, Stark showed a graph with a household income of $196K, it drops from $1,083,000 to $824,000. Good luck at finding something in Pleasanton in that price range, even after the price reductions.
The second major factor is the drop in the stock market highlighted by the 1,200-plus point plunge on Tuesday. The market was flat Wednesday. For buyers in the Bay Area, who often hold stock options or other market-tied securities, their down payment nest egg just took a big hit.
The change has been very rapid, shifting in the last four months according to stats that Stark shared. It’s demonstrated in the median sales price in Pleasanton that fell from $2,050,000 in March to $1,575,000 in August. That coincides directly with aggressive Fed rate increases as inflation continued to rage out-of-control.
As you would expect, the bidding wars for homes have vanished and instead, for buyers who are motivated to act now, they’re patient and waiting for asking prices to be dropped and sellers who open to below-asking offers.
As a result, the time on market and the number of homes for sale have climbed significantly. The number of homes have climbed from less than 10 in December (typically a very slow month) to 78 in August, while average days have tripled from 7 to 25. Less than a month on the market still reflects strong demand despite the interest rates. Home sales have fallen from 100 in the spring to 56 in August.
Stark pointed out that home values soared during the pandemic driven by low supply and the desirability of single family homes on lots with backyards with good schools. The Tri-Valley’s location, equidistant between Silicon Valley, the Peninsula and San Francisco, also made it desirable for couples looking for where to raise their family.
Stark did not see any imminent crash in the real estate market given all of the reforms that followed the financial meltdown of 2008=2010. Most homeowners have fixed rate mortgages with the low interest rates that have been prevalent for several years. For those of us who are older, we will remember mortgage rates that were in double digits in the early 1980s as the Paul Volcker-led Fed fought to bring soaring inflation under control.
Heaven forbid we will see a return to that but President Biden and the Democrats in Washington continue to push for more government spending while inflation has gone from 2% to more than 8% on their less than 2-year watch. It’s an abysmal performance and one that even Democrat economists—think former treasury secretary Larry Summers—warned about when the Fed and the Biden Administration were labeling inflation as transitory and continuing to spend. What a horrible swing and miss.