Bay Area Housing Market Update Q1 2021 | Should we worry about the mortgage interest rates?

I am seriously nauseous from this market. It’s out of control. In this market update, I want to talk about some of the things I see on the ground– some actual stories of bidding situations that I’ve been in personally through representing buyers and sellers. We will also talk about the mortgage interest rates, specifically, how they’ve gone up and what that’s actually done to our real estate market. Let’s go.

Story No. 1: A Buyer I Represented in Temescal, Oakland

The first story is about a buyer I represented here in Oakland. More specifically, they’re looking for a house in Temescal. If you’re familiar with the area, Temescal is located between Piedmont Avenue, NOBE, and Rockridge. Historically speaking, it also has been an area that has not sold for as high as the price per square foot of the houses compared to the three neighboring areas around it.

So we’re looking at this really fantastic three-bed, two-bath, roughly 1,700 square foot single-level craftsman. I knew it would be competitive, but I looked at the comps really closely, and I figured some similar houses that sold near Piedmont Ave and Rock Ridge got into roughly the $850 a square foot range. That puts those properties somewhere in the mid $1.5 to $1.6 million range. It makes sense if you know those neighborhoods. They have been highly coveted areas for a long time for a variety of reasons. But that’s beside the point. Those are higher priced neighborhoods, this one in Temescal, traditionally, is not.

However, when we came onto the offer day, we found out that there are 21 other offers, which is CRAZY. We decided to come in significantly above the comps, but okay, there are 21 offers. Like I said, $850 a foot was pretty typical for some of those other neighborhoods, but you really struggle to find that same value here in Temescal. We came in somewhere closer to $820-$830 per square foot. Mind you, that is still a premium by 20 or 30 bucks per square foot for that size of a house.

So how did we rank out of the 21?

I found out that our offer of a premium price per square foot over the comps is in the middle of the pack. As a matter of fact, that offer put us somewhere in that $1.4M world, but it still smacked in the middle.

The fourth top offer came in with an escalation clause that got them as high as $1.65M. However, they were still just in fourth place with that crazy premium offer. I mean, seriously, what universe are we living in where that is normal? But back to the story, they immediately went back to redraw their offer to add $75,000, which got them to over $1.7 million.

Now I want to paint some context for you here. $1.7 million is not unheard of for some really nice, high-end areas in Oakland especially for a 1,700 to 2,000 square foot home. However, this is Temescal. Nothing against Temescal, its a really great spot, it’s just not one of those neighborhoods historically. 

Because it is close, urban, and walkable, Temescal is usually where you go when you can’t quite afford Rockridge or Piedmont Ave. But despite being super cool and having a great restaurant scene, it is still a secondary neighborhood and not a $1.7M neighborhood historically. But now? It is.

The winning bid got well over $1.7 million, which is absolutely insane because that puts this property at almost $980 per square foot. That’s $180 more than the average property in Temescal and even $100 more than similar homes in Piedmont Ave and Rockridge. It blew my mind. Not only that, but the buyers also had a substantial amount of cash, so it’s really going to close at this insane price and set a new comp.

That begs the question, when is this all going to stop? When are the people going to stop paying these crazy prices?

Story No. 2 - Buyers from San Francisco who were looking into a listing in Trestle Glen who decided not to push through with making an offer

Next, I have a listing over in Trestle Glen at the moment. I spoke to another agent who had a similar competitive listing that took offers just a couple of days ago because I wanted to see what her competition was like. She told me that she had a couple of very interested people coming over from San Francisco who were really keen on buying a home in this area in general. Eventually, however, they got beat out on a couple of houses, so they decided not to put an offer because the prices they were seeing were not good enough deals for them to actually move over to the East Bay.

This is interesting because it’s the first time I’ve heard that.

Traditionally, what’s been happening, especially since COVID started, is a lot of the San Francisco and peninsula buyers are coming over to the East Bay because the price per square foot is generally better. The money actually buys more house.  Also, you can make an argument that the lifestyle is improved. You can get a whole single-family house with a yard that’s walkable at a price point that you would otherwise have to get for a one-bed or two-bed condo somewhere in the city.

However, that’s starting to change, especially in some of these really cool hip neighborhoods. This has already happened on this one house that was over in the Trestle Glen neighborhood where they ended up losing two of their best buyers. They were like, “Hey, San Francisco is looking like a pretty good deal all of a sudden. I’m going to stay over here instead.” I had a feeling that the bumping mortgage interest rates might be the thing that pushed that first domino over to get people to reconsider bidding so much. Ultimately, all that’s happening begs the question, “When is it all going to change?”

How upset should you really be about the 3% mortgage interest rates?

At present, people are upset about mortgage interest rates going up. Well, you know, some people are still getting 30-year mortgages at around 3%. Some are also well into the low two percent. However, anytime something goes up, buyers always react negatively. After all, they feel that they have to pay more for the same amount of money, or for the same payment, they get less buying power. One way or another, it makes a difference.

However, because there’s so much cash circulating in this market, I have yet to see it slow anybody down or give anyone any pause at all whatsoever, which is sort of shocking, to be totally honest with you.

But to put all of that into context, if you can still get a 3% or right around 3% interest rate, that’s really freakin’ good. And here’s why:

When you look back over the last five years of average mortgage interest rates across the United States, you can see that we’ve been at 3.65% in 2016, at almost 4% in 2017, 4.54% in 2018, and almost 4% in 2019. Now, in 2020, we’re back to close to three at 3% again.

So through all of that time, we’ve had really intense competition, we’ve had really strong seller’s markets, and buyers still paying really high prices. When you look at that average, we’re still well below all of that. In addition, the inventory is still really low so we’re still strongly in a seller’s market but the buyers still have really, really good buying power.

Data on Single-Family Home Resales, Median Price, and Affordability Index for the Last Six Years

So clearly, I don’t have a crystal ball here but what I have is data. Something that caught my eye as I was browsing through the California Association of Realtors’ website, where they do a really nice job of pulling together a lot of data and putting it into really understandable infographics and slides, and that sort of thing, is this image below.

What you can see here is data of single-family resales, median prices, and affordability index for the last six years. Interestingly, you will see more single-family resales in 2020 than the previous year. In addition, it also looks like we’re going to have a positive change again this year. However, you’re also going to see that the median price line is going up pretty significantly. We are now at the highest median price in the state of California than we’ve ever seen at $700,000.

Then, when you look at the affordability index, which has a lot to do with not only both the interest rate and how much you can actually afford for that same payment, but also the wages, the actual earnings, the savings, the salaries, etc., you’ll see that it’s been going down as of late. It’s trending downwards, and its lowest to this year as it’s ever been.

 And so now the question is, when will it break? When will it stop?

Frankly, I wish I had that answer. I don’t. But what I can tell you is that there is always a breaking point. There’s always a point at which people stop transacting and people stop climbing over one another.

What's really happening with the inventory?

Anecdotally, right now, all of my inspectors, appraisers, stagers, and all of those people you hire when you need help to prep your house before putting it out on the market are booked out. It’s hard to get a hold of anyone to schedule them to prep a listing right now, which is good because it means that inventory is not that far behind. When inventory starts to rise to meet the demand, it’ll be really interesting to see if there is a flat-lining effect or if people will just keep climbing and climbing.

Lastly, the sellers that I’m talking to, and the sellers my team is talking to, are eager to get on the market before this opportunity escapes them. This is also interesting because it’s showing the psychology of opportunism, of trying to “grab it while the grabbing is good,” if you will. Ultimately, what that does is to be determined, but I’m hoping that this rushing inventory will satisfy some of this aggressive buyer pool because it will give them more options. Additionally, it will create some opportunities for people who are right on that fringe to be able to transact as well and maybe take some heat out of this market.

Going into the Spring Market and What That Really Means

One last thing, we are very much still in a typical spring market right now, in March of 2021. With the exception of last year due to COVID, this period normally is when we experience our hottest market here locally. So it’s not uncommon that we would see the highest prices, the biggest records, and the biggest sales happening in March. However, what’s happening now is taking things to a whole another level. Where does it stop? Hard to say.

There’s also one more narrative about people leaving California and the Bay Area that I want to address here. I also did a blog on this topic about people leaving California and the Bay Area en masse, which is actually not happening in the same way that the narrative would suggest. Instead, data that I’ve found showed that they are redistributing. Much like folks from SF moving to the East Bay. It will be really interesting to see if the population circulation continues or if people actually do start migrating out of California en masse. There are at least five contributing factors to that population redistribution thing that I talked about in that blog and which I also recommend for you to check out as we prepare to go into the Spring Market.

So, where are we at today?

Simply put, it’s incredibly hard to find a property to buy that you can get at a reasonable price. They still exist, don’t get me wrong, but they’re really, really hard to find. And if you find a property that you absolutely love, you better be seriously willing to dig deep financially to get into it. And, if you do, please, please, please make sure that you love that property and you know you’re going to be in it for a long time. Because if you pay what is required right now, when the prices are way up, you have to be in that property for at least ten years, so you don’t ever have to worry about having to sell the property when we’re in a downturn.

Eventually though, prices will flatten out and eventually come back up. But until then, make sure to seriously consider if you’re going to open your wallet and make an offer. Make sure to do it on a property that you can definitely 100% sure can be in for at least ten years. Otherwise, don’t make that offer. You will thank yourself for it.

I hope this Market Update for the first quarter of 2021 and the mortage interest rates has helped you.

If I can give you more context on the process of buying or selling your home, please do not hesitate to reach out. My information is below. 

Here’s to all your success!

Should we worry about the mortgage interest rates?

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Bay Area Housing Market Update Q1 2021 | Should we worry about the mortgage interest rates?

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