09/20/2024
Exciting News on Interest Rates!
September 18th marks a pivotal moment in the real estate market, Federal Reserve announced a half-point reduction in the Fed Funds Transfer rate. Interest rates have been hovering in the low 6% range for several weeks, dipping to 6.1% just this week.
For perspective, rates peaked at 8% about a year ago, in October 2023, and have stabilized around 7% for most of 2024 with only slight fluctuations.
What Does This Mean for Buyers and Sellers?
Let’s break it down. Sellers are primarily focused on their sale price, as that determines how much they’ll pocket after paying off their mortgage. Buyers, on the other hand, are more concerned about their monthly mortgage payments. When interest rates rise, buying power decreases—meaning buyers pay more for the same home. Conversely, when rates drop, buying power increases.
For instance, a buyer looking for a $1 million mortgage would pay nearly $6,650 per month at a 7% interest rate. At 6%, that payment decreases by about $650, making housing more affordable. If rates drop to 5%, the monthly payment would be nearly 20% lower.
This shift opens doors for many potential buyers who have been sitting on the sidelines and will likely lead to rising real estate prices.
Seller Perspective
Now, let’s consider sellers. Buyers who can afford a $6,650 monthly payment at 7% can now afford a $1.1 million mortgage at 6%, a 10% increase in purchasing power. At a 5% rate, that same payment translates to a $1.24 million mortgage—24% more.
As a general rule, a 1% decrease in interest rates boosts buying power by about 10%. This increase in buying power can lead to price appreciation.
While it’s true that buyers might initially seek to pay less for the same home, the reality is that as rates decrease, more buyers enter the market, boosting demand and driving prices upward.
What’s Next for the Market?
Market dynamics are largely driven by consumer behavior, which tends to be predictable. Buyers usually respond quickly to lower rates, often acting fast when they find a property they like, especially if they’re currently renting. Sellers, however, may take longer to react, needing reassurance from recent sales in their area and media reports.
Inventory Insights
In San Francisco, inventory remains tight until more sellers decide to list their homes. According to the National Association of Realtors, 89% of homeowners with loans have rates below 5%, and 59% have rates below 3.5%. This creates hesitance among sellers to give up their favorable rates for new homes at higher rates.
As rates edge toward 5% and below, we can expect more sellers to enter the market, contributing to a more balanced landscape.
Current Market Conditions
For now, San Francisco continues to be a strong seller’s market, with more buyers than homes available. The city has seen a 6% appreciation over the past year, and we anticipate this trend to continue.
If you're a seller waiting for the right moment, now is the time to discuss your options. With low inventory and high demand, we’re seeing conditions that lead to strong sale prices.
And for buyers who have been holding off, we encourage you to enter the market soon. Riding this wave of appreciation could be beneficial, so let’s connect and get you started!
Stay tuned for more updates!
