Bay Area homebuyers weigh higher mortgage rates as real estate market shifts

Mary D'Orazi is ready for a change. After living in her Oakland home for 23 years, the retired Oakland resident is looking to sell and move to a quieter part of the East Bay, or in the Oakland Hills.

But as D'Orazi tours homes, she is keeping a close eye on mortgage rates.

"We're looking for some place that has a little space between neighbors and has a nice nature feel," D'Orazi said while touring an Oakland Hills open house on Saturday afternoon.

The Federal Reserve's quarter-point interest rate hike this week is adding pressure to an already expensive Bay Area housing market. The 30-year fixed mortgage rate has moved above 7%, after being in the high-6% range the previous week.

The higher borrowing costs come as the East Bay housing market has already shown signs of slowing.

The Bay East Association of Realtors reported that single-family home prices fell for the third consecutive month in August. Pending sales also declined significantly from a year earlier, while the median price for an East Bay single-family home fell to $1,117,000 in August.

"The East Bay, in fact, was a little bit slow during summer," said Viviana Cherman, president-elect of the Bay East Association of Realtors. "We saw a lot of inventory come up and taking a little more days to get in contract."

Cherman said higher mortgage rates could discourage some buyers, but could also give motivated buyers more negotiating room as competition eases.

"Some buyers may slow down, and they're like, you know what? We don't want to go buy," she said. "But some buyers are going to take advantage of this, because there is not going to be a lot of competition out there for them."

For D'Orazi, the cooling East Bay market creates a complicated calculation. She needs to sell her current home while also trying to purchase another.

"If we're going to stay in the East Bay and buy in the East Bay, it's a good thing. But we also have to sell in order to buy. So it's kind of like a double-edged sword," she said.

Across the Bay, the real estate picture is very different.  There may be no hotter or stronger market in the country right now than San Francisco.  Some houses are selling a million dollars over asking.

San Francisco's housing market remains closely tied to the region's technology and artificial intelligence boom, according to veteran broker Kevin Ho of Vanguard Properties.

"If our rents were lower, then I think the 7% barrier would have more of an impact," Ho said. "But because our rents are so high and our inventory is so low, and the epicenter of the AI evolution is in San Francisco, I don't know if the market will cool."

Ho said crossing the 7% threshold could nevertheless create a psychological barrier for some buyers.

"The big thing I think it's going to happen is that it's going to sober the market ever so more," he said. "The properties have to be that much better. The buyers who are using financing, they're going to take a look at it with a little more skeptical eye."

Over the past three years, MLS data shows roughly two-thirds of San Francisco homebuyers financed their purchases, while about one-third paid cash.

For D'Orazi, the challenge is trying to make the timing work on both ends of the transaction — selling her existing home while finding a new one at a price she can afford.

She also worries that San Francisco's booming housing market could eventually push more buyers across the Bay into Oakland and other East Bay communities.

"There is some pressure to make a move sooner than later," D'Orazi said.

Some real estate professionals use a phrase to describe the strategy they recommend to buyers facing high interest rates: marry the house, date the rate.

The idea is to buy when the price and circumstances make sense, then refinance later if mortgage rates decline.