How the Bay Area housing market is reacting to recent interest rate hikes

Photo of Tessa McLean
A view of homes in San Francisco. Recent indicators suggest that the region's typically red hot real estate market is set to soon cool off. 

A view of homes in San Francisco. Recent indicators suggest that the region's typically red hot real estate market is set to soon cool off. 

Justin Sullivan/Getty Images

It doesn’t matter if you’re in the market for a home right now or not — everyone’s talking about rising interest rates. The Federal Reserve raised its rate three-quarters of a percentage point in June, the biggest increase in nearly 30 years, and after two years of a red-hot housing market, there are signs everywhere that home buying may finally slow.

Real estate experts are starting to see Bay Area home buyers drop out of the market entirely, fewer people turn out for open houses, homes sitting on the market for more than a few weeks, and even — gasp — the return of some contingencies. Plus, rates are expected to continue climbing. 

Many of these consequences of rising interest rates, especially when coupled with high inflation, aren’t exactly surprising. What might surprise some Bay Area residents though, is the impact all of this could have on the rental market.

“​​When we look at the price of renting versus the price of a mortgage [in the Bay Area] this is the largest divide we see across the country. It’s almost three times more expensive to pay for a mortgage than to rent, so we’ll likely see rent rise as a result,” Nicole Bachaud, an economist with Zillow, said.

If a seller can’t sell their home, they may decide to rent their property while they wait for it to sell, in addition to having to rent themselves, since in the Bay Area it’s rare to live in your home while it’s on the market. Moreover, those who were in the market to buy are now back in the rental market, perhaps looking to upgrade their space since they weren’t able to buy. 

While the Bay Area may be the only place in the country where rents have not surpassed pre-pandemic levels, that’s unlikely to last in the current environment.

Bachaud said interest rate hikes are more likely to hit first-time home buyers in the region harder than they would in the rest of the country, forcing many out of the market entirely. “When you look at the typical home value in San Francisco at $1.5 million, that’s up significantly, about 30%, since before the pandemic. When you also couple the interest rate hikes with that, you’re looking at thousands of dollars more a month in a mortgage than even just a year ago,” Bachaud said. “Using that example and looking at a 3% interest rate versus a 6% interest rate, that’s more than a $2,000 difference. That’s more than most people’s mortgages across the country.” 

Redfin agent Andrea Chopp said while so many buyers have been priced out of the market, she thinks it’s actually a great time to buy — if you can afford it. “A lot of [homes] are just sitting now. There’s no competition. Where there might have been competition a few months ago, now you have interest rates, high gas prices, inflation and people have just stopped,” Chopp said. “Buyers right now have the most power they’ve had since I’ve been doing this.”

It’s still the Bay Area, though. “For the buyers still in the market, they’ll see less competition and they can take a little more time to make decisions … but it's not necessarily going to be a buyer's market because we’re still going to have homes that are still unaffordable for most folks,” Bachaud said. 

While inventory has increased across the Bay Area in recent months, rising interest rates could continue to make inventory a challenge, as those homeowners who locked in at a low rate are less likely to list their homes since they won’t be able to buy something at the same rate. “That’ll keep prices high for the foreseeable future,” Bachaud said. 

Chopp, an agent since 2015, said some of her sellers are considering renting their properties given how long it’s taking to get an offer. She said sellers have had to adjust their expectations and be prepared for a lower price than they were anticipating and even accept contingencies. “Now all of a sudden three weeks on the market and sellers are freaking out. That’s normal in the rest of the country,” Chopp said. “Contingencies were impossible before.” 

Listings with a price cut have risen to 8% up from 5% in April in San Francisco, according to recent Zillow data. “Sellers may have been a little too ambitious given the changing tides we’re seeing,” Bachaud said.

There is typically a slight summer slowdown in the housing market, but the past few weeks have been jarring. “It's like it just stopped. Buyers have completely disappeared,” Chopp said. “Since I've been doing this, it's never been this slow.”

But we’re likely still in the midst of a transition, and experts say to look at pending sales data, which is cooling, according to a recent Compass report. Even with all this volatility, the Bay Area is a wealthy region and there are plenty of buyers paying with cash for whom mortgage rates don’t matter.

Bachaud said that it’s important to remember how differently housing markets like San Francisco and New York operate from the rest of the country. “In the rest of the country we’ve seen record-high home price appreciation, but in the Bay Area we didn't get even near the peak appreciation we saw in 2013,” she said. “As fast as the area was growing recently, it’s had faster periods of acceleration.”