Have We Reached an Inflection Point?

We're deep into the Fall Market and gratefully, it has delivered some terrific results. That being said — and for the first time in many years -- Sarah and I ran into some pushback on a property which was accepting offers earlier this week. With interest rates now topping 7.25% (and projected to rise higher still), Buyers may have finally reached an inflection point.

Typically, multiple offers provide the kind of leverage that incentivizes potential Buyers to spend more in competition, but frankly, that was a much easier ask when interest rates were less than half of what they are today. Put more bluntly (because my job isn't to sugarcoat the marketplace) the expectation that Buyers will happily fork over hundreds of thousands more than the list price, may no longer necessarily be a foregone conclusion.

Consequently, even when we were explicitly asked to send a counter offer to one colleague's "motivated Buyers," the unexpected response after several hours of waiting to ratify was: "They've decided to hold at their original number," and that sentiment seemed to carry the day. While we eventually, and successfully secured a deal with those same Buyers, it wasn't the cake walk that we'd anticipated when the day began.

As one well regarded Appraiser remarked on tour this week, "Are we now seeing some of the air come out of the marketplace given the higher interest rates?"

The short answer is "quite likely."

In fact, the concept was brought home in a mortgage newsletter I was sent earlier this week that succinctly put it best: "Your Sellers think in 'price.' Your Buyers think in 'payment.' Those are two different languages, and in this market, the gap between them is where a purchase stalls."

I couldn't agree more.

And while Piedmont is often buffered by the general ups and downs of the greater economy, it's NOT entirely immune from higher prices EVERYWHERE.

Which is why, (and I say this with all due respect) it's important for Sellers to understand that Buyers don't care about what you want, what you need, what you must have, or what you believe your house is worth. They care about the price of their monthly nut. They care about the cost of healthcare, daycare, groceries, gas, and what vacations they will have to forego in order to afford a home. They CARE about the cost to borrow.

With the help of AI, let's break this down into real figures . . .

Assuming a $2.5M purchase price with 20% down (that's $500k), leaving a $2M balance, with a 30-year fixed mortgage, AND assuming 1.10% property tax as a reasonable estimate, (California’s base property-tax rate is 1%, with additional voter-approved charges varying by location) the monthly mortgage breaks down as follows:

Monthly mortgage at 3.0% on $2M = $8,432.00
Monthly mortgage at 7.25% on 2M = $13,645.00

With Insurance the totals may calculate as high as: $11,224 per month, or $16,437 respectively. (Insurance premiums have tripled in many instances.)

Thus, the annual PITI (principal, interest, taxes, and insurance) on the same property is approximately $134,688 vs. $197,244 at the higher interest rate, OR an extra $5,213 per month, equating to approximately $62,556 more per year. That's more than a few bucks, especially extended over a 30-year period. (BTW, interest rates are expected to go up another quarter in the next few weeks.)

And while Buyers certainly appreciate and quantify any upgrades and improvements you have made to the property, your sentimental attachment to the house likely carries NO VALUE for the prospective Buyers (although they LOVE the Seller letters explaining how much you've enjoyed the home). In other words, try to assess your property as a potential Buyer might, and then set your expectations accordingly.

On the flip side, we still live in an area of extremely limited inventory, high net wealth, newly-minted millionaires, world-class universities, and enviable weather, making Bay Area Real Estate a solid bet for the foreseeable future. Until supply & demand change, the Bay Area should continue to be a good investment, even if it softens a bit. (The next several months should tell the story.)

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