“Buyers are finding it more difficult to finance purchases because of higher mortgage rates and stricter lending standards, Freddie Mac said. The average U.S. rate for a 30-year fixed rate home loan probably will be 6.7 percent this quarter, according to the forecast. That’s the highest level so far this year, and it’s half a percentage point above the 6.2 percent average in the first three months of the year.”
U.S. Housing Sales to Tumble to Six-Year Low on Rates [Bloomberg]

51 thoughts on “JustQuotes: When (Not If) Rates Rise What Will Happen To Prices?”
  1. And 6.7% is still extremely low, Rates were in the 8% range in 1999 and 7% range in 2000, when rates dipped into the 6% range I remember co workers who had owned for decades expressing almost disbelief that rates could go that low.
    Now, 6.7% is high?

  2. Jamie,
    I’ve heard the same about rentals recently. A friend of mine went to look at a place in Lower Pac Heights a few days ago – the open house was from 2-4pm and he showed up at 2:15 – and the place was already rented. There were 10 or so people coming and going just in the five minutes that he was there.
    If only Trinity was opening soon!

  3. well clearly interest rates/monthly payments were to high for many in CA
    “California Foreclosure Sales Reach $12 Billion in First Half of 2007: Up 95% From January to June”
    “Lenders are building a significant REO inventory. Since January 1, 2007, a total of 29,696 California properties have been returned to the lender for an astonishing total loan value of $12 Billion. This is unprecedented.” In June alone 6,552 properties were returned to the lender for a total of $2.69 Billion.
    But, at least one builder has stopped playing the incentive game and has decided to start dropping prices (again/more)
    “… the builder lowered its prices in response to sagging sales. The company expects to see a loss for both the third quarter and the nine months ended June 30, after charges.”
    “D.R. Horton said its cancellation rate for the quarter was 38%, up from 32% in the fiscal second quarter. During the company’s last quarterly conference call in April, executives said the historic rate was about 16% to 20%.””
    and of course we still have the spill over into the retailers like Home Depot and Sears who posted losses today and the ongoing CDO crisis in the Bond market.
    but hey look on the bright side, ‘subprime is contained’

  4. If you think Lower Pac Heights is hot, imagine how frenetic Pac Heights is? Lucky landlords. Prices have appreciated well this year in Pac Heights as well. Pretty frustrating as a potential buyer.

  5. This already is, and will continue to, dampen demand and prices — yes, even in SF. A huge percentage of buyers — even very creditworthy ones — in recent years have been able to buy in SF at all price levels only because of extremely low rates combined with teaser features that kept payments even lower for the first couple years. That pool of buyers has now dried up. Banks aren’t providing these risky loans to them, and buyers are not going to take on the huge risk in what is now universally perceived to be a declining (or flat at best) market.
    Recent market softening is going to accelerate. The only remaining debate is how soft it will go and for how long.

  6. Badlydrawnbear is completely right. Rates never went below 7% between like 1965 and 2001! Since when is 6.7% considered high? Greenspan screwed us all by lowering rates MUCH lower than they EVER should have gone, but that was just too aggressive of action to recover after the dotcom bubble burst and everyone needed some other (easy) way to become a millionaire. I can remember when my mother had an 18% rate in the 80s! In the rest of the country, the difference between a 500k house and a 600k house is HUGE! It translates into an extra 1000 s.f. of space or incredibly higher-end appliances or a totally more upscale part of town. Here, it is a blip. People are willing to pay an extra $300k for new IKEA cabinets. A lot of that is because it doesn’t make as large of a difference in monthly payments (although, still FAR more than the average San Franciscan can afford). We all need lower prices that more people can afford and higher rates that don’t make a million dollars SO easy to borrow.

  7. BTW, 30-yr fixed rates are more like 6-6.25% for a JUMBO mortgage and not 6.7%. Just call any bank. The 10-yr yield is still only at 5.03%. Don’t know where 6.7% came from. And, if you take out a 5yr ARM, rates are closer to 5.75-5.875%.
    We need cheap and affordable housing for all in SF. I agree.

  8. With home prices dropping we will be seeing a lot more people cashing in and selling so they can rent (and buy their old home back for 25% off).

  9. Bloomberg knows what it is talking about. Current 30-year jumbo rates (and any SF loan will be a jumbo) with no points are around 6.7% – 7%. You can do about 1/2 – 3/4 point better on a 5-year ARM. But no way are you going to get 6% on a 30-year fixed jumbo unless you pay big points. It is true that these are still not that high by historical standards, but then again neither is the 100% price run-up in the last 6 or 7 years in SF. These higher rates will have a big effect here in turning things south. The party was already over months ago, and now the clean-up is underway (bad for sellers, but good for buyers with good credit and a decent downpayment).

  10. Do people on this board honestly believe prices are dropping in SF? Have you gone to any open houses? Have you actually seen comps? 2200 Sacramento St. #108 anybody (socketsite)?
    I’m all for affordable housing for all, but i’m a realist.

  11. Not yet, but they will. The supply and demand of money has been out of whack with reality for the last 5 years. It’s about to realign in a big way and will affect a lot more people who previously thought were untouchable.
    WASHINGTON (MarketWatch) — Standard & Poor’s just drove a huge harpoon into the heart of the mortgage credit bubble, and it’s going to take a long time to clean up the mess once the beast finally dies.
    S&P, one of the three main credit-rating agencies that served as enablers of the subprime-mortgage boom, announced Tuesday that it would lower its ratings on 612 bonds, a small portion of the mortgage-backed securities it had given its seal of approval to. See full story.
    But the bigger news is that S&P isn’t going along with the charade anymore. S&P said it would change its methodology for rating hundreds of billions of dollars in residential-mortgage-backed securities. And it would review its ratings on hundreds of billions of dollars in the more complex collateralized debt obligations based on those subprime loans.
    A lot of debt will be downgraded to junk status. A lot of that debt will have to be sold at fire-sale prices. A lot of pension funds and hedge funds that once thrived on the high returns they could get from investing in subprime junk will now lose a lot of money.
    S&P’s announcement is a death warrant for the subprime industry. No longer will mortgage brokers be able to help buyers lie their way into a home. Fewer stressed homeowners will be able to refinance their mortgage, thus extending and exacerbating the housing bust.
    “We do not foresee the poor performance abating,” S&P said.
    Prices will fall, and foreclosures will rise. More mortgage fraud will be uncovered as the tide goes out.

  12. The jury is out on what will happen to prices in the City and County of San Francisco. Location is still an important aspect.
    What makes this housing downturn different and unpredictable is that it is not following an economic downturn with layoffs and so on. In the past, housing slumps followed people losing their jobs and getting in a tight financial squeeze.
    Right now, the job market continues to be strong. The stock market, courtesy ex-United States growth, is strong. Consumer sentiment is relatively good – though I question if younger folks trying to afford college and get their adult lives started are really all that positive about the economy right now.
    The folks that were last in the door and took out weird loans to buy a home they couldn’t really afford are screwed… but I’m not so sure that is a large number of people – at least not so large as to affect other parts of the economy or housing prices in general.

  13. “Do people on this board honestly believe prices are dropping in SF?”
    Look to the number of new developments offering incentives – from Potrero to Mission Bay. That keeps “comps” in line while underlying prices have actually dropped (if only by $10-20K). It’s some of the best apples to apples data out there with regard to “the market” and much more telling than a single family home selling for over asking. Properties that have been listed under market will continue to sell over asking with multiple bidders – and be the poster child for agents throughout the city – but that doesn’t mean the market is up.

  14. And fully 25% of the listings on the SF MLS (317 out of 1288 on one source) have reduced their offering price. This is at all price levels and includes “hot” properties featured on socketsite (see 745 Detroit reduced from $1,700,000 to $1,595,000 and then again a month later to $1,495,000 — and still no buyer). There’s no denying that evidence of a slowdown. It has started and will accelerate. Will there be hot properties with lots of bids? Sure — just like there were during the peak of the early 90s slump when prices fell big time. But the rule in the near future is lower demand and lower selling prices. Might be shallow and short-lived or deep and long-term, but we are clearly in a downturn.

  15. “The jury is out on what will happen to prices in the City and County of San Francisco”
    We all know how its going to end. A bubble is a bubble is a bubble. No matter what your real estate agent is telling you. Sold my house in SF last year. Can’t wait to see events unfold. Should be a lot of fun to watch.

  16. The usual boosters seem quiet lately, so I’ll fill in. Gotta add some yin to the yang.
    “Are you people crazy? The market is white HOT!! Some property somewhere sold for 400% more than its last sale in 1977 after being on the market for only 5 minutes. People camped out all night to bid on it, it was like a new Star Wars premier. Next Fed meeting Bernanke will lower rates to 1% because inflation is gone. Then rich foreign investors will come in and buy up all of California. The whole state. Even Fresno. Get to a Realtor before their plane lands or you’ll be living in your Prius in 6 months.”
    Please note I left out “They’re not making any more land” and “It’s different here.”

  17. While we maintain 4.5% unemployment and the stock market is going gangbusters overall? Hmm…. I say the jury is still out.
    One thing seems to be certain… with much tighter credit for buying homes, rents are going up in the City.

  18. “One thing seems to be certain… with much tighter credit for buying homes, rents are going up in the City.”
    The difference being that if you want to qualify for a multiple thousand monthly rental, you need to proof that you actually have the income to support it. And – shudder to think of it – you might actually have to pay something to move in: it’s called deposit. Should be quite a change from the nothing down move ins of happier days…..

  19. $200,000 homes for everyone soon! God bless us, everyone! Rents are going up, unemployment is low, salaries are going up, but because of some subprime loans and such (used much, much less frequently here than in Sac, for example), the price of properties in one of the world’s most iconic cities will be 25% of current value soon.

  20. Maybe not 25%, but could you survive if prices fell only 10% or 15%? What about those who have prime credit but put 0% down and took out interest-only loans? That’s a lot of people in this city. Suddenly they can’t refi, or their loan starts to amortize, and they can’t sell for what they paid. What do they do then?

  21. Prices on properties slip a little (or stagnate). The other posters seem to think that the beginning of the end of prices as we know it is now here. I just don’t see that happening – the vast majority of the people here that bought may have overextended – but they didn’t deplete their savings 100%. Does it make more sense for them to maybe you know, stay put for a bit and churn through savings rather than dumping tons of properties on the market when the market is clearly not good? I just don’t see this impending “spiral of doom” here.

  22. Agreed, but I’m predicting that many will not be able to “stay put for a bit” because they completely overbought. This is why foreclosures are shooting up so quickly nationwide. When your mortgage goes from $2,600/month to $3,500/month, and your net pay is $4,000/month…eventually those savings start to disappear and people just walk away. The boom lasted 5 years, the upcoming down cycle may also last 5. I guess only time will tell.

  23. But lots of people have to sell at any given point in time for the old reasons (i.e. not flipping). They get a new job out of town, they get divorced, they have kids and need more room, they have kids and want to move to the burbs where the schools are better, they are retiring in Arizona. A growing number of buyers being forced to sell because they are overextended will only add to the pool. Recent trends are drying up the buyer/demand side — that is what is causing (and will further cause) prices to drop. Will they plummet? Who knows? But dropping 10-15% and stagnating for a few years (as in the early 90s) is a huge drop in real terms.

  24. You’re suggesting that net monthly pay for many buyers here over the last few years is only $4000 per household? That seems absurdly low. If we’re talking about the metro, sure, but for SF?

  25. ph – prices are dropping all over the place! Just because the median price has risen in SF lately means nothing. The month that all the residents of the 3000 block of Broadway decide to all swap houses, are you going to believe that the SF market is “white hot” because the median sale price that month is $40 million??? High-end sales have keep that number high – that’s all.
    Where are people getting a “strong job market” from? Most of the job growth is low paying retail/fast food jobs. The Chron. published last year that 2005 SF salaries increased just 1.6% (totally eaten up by inflation). Anyone have the 2006 numbers? Only the rich are getting richer. And Jamie makes a GREAT point about the newest college grads. All my friends are over $100k in debt from college and the thought of a home mortgage too is not even on the horizon. Soon, the entire first-home-buyer pool will dry up and when current residents die, SF will become a ghost town!
    San Francisco saw housing prices drop 30% in the early 90s. Since the average socketsite age is 37, that would make us ALL too young to remember. You may think that “SF is different,” but that’s only because you’re too young to remember when it wasn’t. You’ve grown up under the propaganda.

  26. rg – not sure if you’re aware, but two thirds of San Francisco households rent. Do you have the median household income of owners?

  27. 2/3 of San Francisco households rent? Really? If this is true, it is more because of rent control than anything else. It seems that some of the lowest rents are in some of the choicest areas. I have a friend in the Marina who is the only person in her building paying market rate, everyone else has been in there well over 10 years and is paying on average around 1,300 for a 2bd. I think rent control is one of the worst things ever to happen to san francisco.

  28. rg – Sweet. Another person that doesn’t recognize that prices in SF are influenced not only by jobs in SF, but also by jobs in the rest of the metro. How many of you know someone who moved out of the City because of cost? Could they possibly be coaxed back if prices started to drop? Would that not have some effect on the supply/demand equation?
    There certainly might be price drops in SF, but to leave out facts in order to advance the “Sky is falling” agenda is downright nasty.

  29. Don’t know why people have to be so extreme. Either the market is red hot or the sky is falling. Is there nothing in between? It’s not a binary system guys – prices can be flat or slightly down.
    Nobody here is saying that million dollar condos will go for $250K in a year. But I do believe that prices in the city will fall, and need to fall, by at least 15% in real terms to restore balance to the market. The bubble here has been no different than the one in Phoenix, Vegas, or Sacramento. We just have less land and make more money, so our adjustment will be slower. Let’s say it’s a “sky is being lowered a few notches” agenda.

  30. Dude,
    The only thing that I think is different here is the disconnect between price of buying housing versus salary is significantly higher here than it is in Phoenix, Vegas, or Sac – and more importantly, it was also significantly higher five years ago at the beginning of the boom.
    Five years ago, a person making below median income in Phoenix couldn’t buy a home – then all of a sudden, because of bizarre lending practices, low interest rates, etc, they could buy a home. People at median income could buy a bigger home, etc, etc.
    Five years ago, a person making below median income in SF couldn’t even imagine buying a home, and guess what? That never changed in the boom. Even the vast majority of people at median income couldn’t afford to buy a home at any time during the boom. Sure, a few got through – but the relative unaffordability of SF BEFORE the boom is exactly what I think will help shield SF from some of the big price drops that you’ll see other places. Your thoughts?

  31. So I’m among the 2/3 of San Francisco residents who rent because… my apartment is under rent control. Let’s imagine the following: tomorrow, rent control is canned. Lets also tighten the money supply enough to drop existing housing prices by 20%. Do you think I would be able to afford a condo in the next few years, given that I make that mystical figure, the median income of a family in SF?
    At that point, a two bedroom apartment would still cost $600,000. Guess who still can’t afford that, even with a six figure down payment? Even if housing gets cheaper (which I’m just fantasizing about), it would still be too costly for most people in town who don’t already own something unless prices drop in half. Call me when dropping rent control makes a two bedroom condo cost less than half a million dollars.

  32. I’m not going to pretend that I know anything about SF real estate, but why do I have the feeling that everyone is right on some level? I think it’s an overgeneralization to say prices will fall 10-15% across the board. While it’s pretty obvious that many places in SF are overvalued, I can’t imagine that prices of decent SFHs Noe Valley and Pacific Heights are going to drop in spite of rising interest rates and the tightening of lending standards. However, with the sudden glut of condos in parts of SOMA, I could see prices of these properties, and also older condos in, say, the Richmond and Potrero Hill stagnating and falling, perhaps by quite a bit. Buyers will become more discriminating and demanding of sellers. People will continue to pay top dollar for great properties in prime areas, but overpriced homes and condos outside of certain exclusive enclaves will just linger on the market.

  33. Before anyone guesses what happens if rates increase, does anyone look at mortgage rate forecasts? Guess not.
    2007 Jun Jul Aug Sep Oct Nov
    Forecast Value 6.39 6.30 6.15 6.02 5.91 6.07
    Anyway, of course the low-end of the market will be hit by lower rates and of course the top-end won’t.

  34. Hmm.. those mortgage rate forecasts seem to ignore that central banks in many other countries are increasing their interest rates to try to curb fanstastic growth (inflation worry), and the United States has to compete for that money to keep financing our national debt. Economists in the US have started talking about a possible rate hike in 2008 … a very different story from just months ago. 30 year loans under 6%? Very doubtful in my humble opinion.

  35. Even if one gives these rate forecasts any credibility at all (your July “forecast” is about .5% below the July “actual”), these are just for conforming 30-year fixed mortgages, not the jumbo mortgages that apply to 99% of SF purchases — jumbo loan rates tend to be about .25% higher. I don’t think anyone is forecasting significant rate reductions in the near future. The range of forecasts appears to be slightly lower at best and substantially higher at worst given the current sub-prime problems.

  36. badlydrawnbear,
    I think one thing you do have to think of for this bubble as compared to the last bubble is what the prices were going into the bubble (as someone else already mentioned). Home prices pre-bubble were already unaffordable for most San Franciscans, and the low interest rates/shady lending practices didn’t open nearly as many doors here as it did in other places in California and the rest of the country. It allowed many people to overbuy, which is certainly going to continue to cause problems, but we’re not going to have nearly the problem here with people who shouldn’t have been buying anything at all – ie those who drained their savings and have absolutely zero wiggle room.
    That could still lead to large price decreases or a long period of stagnation, but I think it will take longer for it to develop – we’ll probably lag at least a year behind other areas, and I think 25% seems a touch on the high side (I would say half that, for the market as a whole – simply because there will be large parts of the market here that are untouched – SOMA condos could fall by that much or more)

  37. “San Francisco saw housing prices drop 30% in the early 90s.”
    Actually, housing prices dropped less than 10%:
    1987 2730 247,901
    1988 3039 313,230 26.4%
    1989 2766 362,438 15.7%
    1990 3858 361,772 -0.2%
    1991 3454 345,520 -4.5%
    1992 2718 338,346 -2.1%
    1993 2786 329,087 -2.7%
    1994 2894 328,748 -0.1%
    1995 2511 343,006 4.3%
    1996 3027 365,276 6.5%
    1997 3319 394,354 8.0%
    1998 3372 476,793 20.9%
    1999 3458 561,176 17.7%
    2000 3106 729,749 30.0%
    2001 2694 751,361 3.0%
    2002 3098 751,211 0.0%
    2003 3393 810,998 8.0%
    2004 3305 948,260 16.9%
    2005 3027 1,088,166 14.7%
    2006 2614 1,125,719 3.4%
    Annual Average: 8.7%
    1987 899 235,379
    1988 1169 248,581 5.60%
    1989 1088 295,371 18.80%
    1990 1643 318,322 7.80%
    1991 1454 308,344 -3.10%
    1992 1075 305,437 -0.90%
    1993 1120 289,245 -5.30%
    1994 1287 306,490 6.00%
    1995 1161 313,776 2.40%
    1996 1665 315,050 0.40%
    1997 2031 343,011 8.90%
    1998 1986 415,213 21.00%
    1999 2255 493,977 19.00%
    2000 1959 652,364 32.10%
    2001 1637 620,778 -4.9%
    2002 2462 612,777 -1.3%
    2003 2886 612,823 —
    2004 3184 714,201 16.5%
    2005 2917 835,236 16.9%
    2006 2429 841,178 0.7%
    Annual Average: 7.4%
    Source: SFAR
    [Editor’s Note: Also available in an easy to digest SocketSite styled graph.]

  38. there is little difference between people who shouldn’t buy and those who “overbuy”.
    Although most San Franciscans cannot afford to buy a home, even those that do seem to have overbought IMO.
    when I look at all my friends with mortgages, it is insane! They maybe make $150,000/year and they have a mortgage for $750,000.
    not only that, most have almost no savings (they use all their potential savings for their mortgage) no 401k (mortgage again) and also little to no equity in their home, unless they bought early enough in this RE cycle.
    Thus, they are feeling squeezed, even on $150,000/year.
    San Franciscans are well off, but not nearly half as well off as they think they are. There are a very few who have big bucks. all of them combined would maybe fill the housing in the Northwest part of the city. The rest of the folk are regular Joes…

  39. that said, the original point of the article is accurate.
    Most people don’t know how mortgages are funded.
    BEFORE: A bank made a loan to a consumer who promises to repay. In the past, the bank kept the loan, so they really cared if the consumer could repay. (if the consumer didn’t repay, the bank eats the loan). Hence, they were very strict whith their lending guidelines.
    Then we got financial “innovation”
    1. A lender makes a loan to a consumer who promises to repay.
    2. The lender immediately takes that loan and bundles it with a bunch of other loans and sells it to an investment bank like Bear Stearns
    3. those investment banks take that bundled product (called an MBS) and chops it up into different products (called CDO) that theoretically have different levels of risk. It then sells the CDO to various pension funds and hedge funds and other investors.
    here, the lender doesn’t care as much if the consumer repays the loan, because they SOLD the loan to someone else for a fee. (there are permutations to this though). Thus, they were more liberal with their lending guidelines (if the consumer doesn’t repay the loan, the owner of the CDO takes the loss, not the bank.. again with permutations)
    Moody’s and S&P have been rating all these CDO (and other products like CDS and synthetic CDOs) as INVESTMENT grade (which allows pensions etc to buy them.)
    the CDOs are taking a beating, and nobody knows how much they are worth. Everybody knows they are not worth very much (guesstimates are between 5% and 50% of face value). thus, investors don’t want to buy these any more.
    now Moody’s and S&P have downgraded many of these CDOs to JUNK status. thus, pension funds, etc must SELL them. All the selling (with nobody wanting to buy) will decrease their worth.
    S&P says going forward it won’t rubberstamp CDOs with “INVESTMENT GRADE” anymore.
    Banks will no longer be able to sell these bundled loans as easily. That means that there is less money to lend out, and the bank is more at risk. That means they will charge their consumers MORE interest to take out a home loan.

  40. “While it’s pretty obvious that many places in SF are overvalued, I can’t imagine that prices of decent SFHs Noe Valley and Pacific Heights are going to drop in spite of rising interest rates and the tightening of lending standards. However, with the sudden glut of condos in parts of SOMA, I could see prices of these properties, and also older condos in, say, the Richmond and Potrero Hill stagnating and falling, perhaps by quite a bit. Buyers will become more discriminating and demanding of sellers. People will continue to pay top dollar for great properties in prime areas”
    David, I have to disagree with you. The “prime markets” are not immune to the price drops of surrounding areas within the city. On a personal level, if you find you could buy a nice large 3 bedroom condo in Hayes Valley for $500k, and then a smaller, not as nice place in Pacific Heights costs $1 million, you’ll probably opt for the Hayes Valley one, thinking, “sure, I love Pac Heights, but that price difference is not worth it.” Renters make these decisions all the time, and so do buyers. Pacific Heights may always be more expensive than Hayes Valley, but the prices do have a relationship to each other, and if it gets too far out of wack, the demand will move to Hayes Valley until the prices get back in line.
    What I mean is, there is no “micro-market” immune to price drops in SF unless you’re talking about properties over $2 million or so, and even those will be impacted over time by a major correction. If they’re coming down significantly in SOMA and Portrero, that will impact Pac Heights and Marina in short order.
    Same goes for outside the City. I want to stay here, but if I find prices in Mill Valley get cut in half while SF is still rising, I will have to re-evaluate. These impacts may take some time to work through the markets, but they inevitably do.

  41. Dear ex SF-er, your explanation at 9:59am is one of the best “easy to understand” summaries of what has happened recently I have read.

  42. My opinion on the state of the market is influenced by my own personal set of circumstances. Having bought my place in early 2004 I believe I have some equity based on current sales activity in my neighborhood. I’m not naive enough however to think that this equity could not be wiped out relatively quickly with a 1% increase in rates from their current levels.
    Ultimately the Real Estate market is like any other market and is due for a relatively significant downward correction, (which is already well under way). Do I think prices will drop across the board by 25% in San Francisco? Not likely…but as Tim points out, you shouldn’t necessarily believe that because you own in a “desireable” area in the city that you are insulated from a drop in value of your property.

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