Welcome to our March newsletter, where we’ll explore residential real estate trends in the East Bay and across the nation. As your local real estate experts, we feel it’s our duty to give you, our valued client, all the information you need to better understand our local real estate market. Whether you’re buying or selling, we want to make sure you have the best, most pertinent information, we’re here to support you.
Mortgage Rate Hikes Definite
On January 26, 2022, the Federal Reserve (the Fed) indicated that it would raise the federal funds rate as soon as March for the first time in over three years. And that’s just what they did. The Fed adjusts the federal funds rate to influence broader interest rates, which directly affect the borrowing costs of banks. Generally, if bank borrowing costs are low, consumer borrowing costs will be low(er), and vice versa. The Fed uses interest rates in particular as a tool to meet its dual mandate of maximum employment and price stability. Employment and price stability are long-term indicators for home prices.
Although unemployment seemed dire in 2020, we are now on solid ground. Employment rebounded considerably from the highest spike in unemployment in modern history in spring 2020 to pre-pandemic levels by December 2021. As you might imagine, high unemployment rates for extended periods lead to less overall wealth: Fewer people buy homes, and more people experience foreclosures, thereby lowering home prices. If we view the current record-high 10.5 million job openings, along with the nearly 10 million new businesses created over the past two years, we get a better understanding of why unemployment dropped so significantly despite a record number of job openings. Simply put, people are working, and that is good for individual wealth and the larger economy.
Rising mortgage rates could help curb inflation and create a more balanced housing market (although 2022 will surely be a sellers’ market), but it will make homes more expensive monthly, hitting first-time homebuyers the hardest. While we wish that we could always be in periods of high employment, low inflation, and low interest rates, as we experienced for nearly a decade before the pandemic, we must recognize the atypical nature of that period.
The Local Lowdown
Single-family home prices in the East Bay began the year slightly below all-time highs. The housing market in the East Bay, however, has a major advantage in that a large number of people simply want to live here, which has reduced inventory to record lows. Sellers can expect multiple offers, and buyers should come with competitive offers. The high demand we’ve seen over the past year might wane as interest rates increase; however, the supply is so low that the market can handle a drop in demand.
As we enter this new chapter of rising mortgage rates, we don’t expect home prices to change significantly, if at all, because supply is still such a driving factor. In December 2021, there were 57% fewer homes on the market than in December 2019. The low supply means that demand can decline without affecting prices. Does it matter if ten offers drop to five? Probably not, and it might even create a better market. Sellers tend to become buyers, so unless you’re a first-time homebuyer, you’ll likely experience both sides of the market. We don’t expect price appreciation to see the record gains we experienced over the past two years, but we do expect home prices to increase.
As always, Arrive Real Estate Group remains committed to helping our clients achieve their current and future real estate goals. Our team of experienced professionals are happy to discuss the information we’ve shared in this newsletter. We welcome you to contact us with any questions about the current market or to request an evaluation of your home.