February 20, 2014
As Mortgage Rates Tick Up, Applications And Home Sales Are Falling
The average rate for a conforming 30-year mortgage ticked up from 4.28 to 4.33 percent over the past week and is now within 25 basis points of the two-year high of 4.58 percent recorded this past August, one percentage point and change above the all-time low of 3.31 percent recorded in November 2012.
The average 30-year fixed mortgage rate was 3.56 percent at this time last year, a little over half the 6.71 percent it has averaged since 1990. The fixed 30-year mortgage rate has averaged 8.61 percent over the past 40 years.
As we reported yesterday, despite an increase in the number of existing homes listed for sale in U.S. on a year-over-year basis, applications for mortgages to purchase a home are down 17 percent and the National Association of Realtors Pending Home Sales Index has fallen to its lowest level since 2011, down 8.8 percent year-over-year.
Home sales in San Francisco were down 10.2 percent on a year-over-year basis in January.
First Published: February 20, 2014 11:30 AM
Comments from "Plugged In" Readers
Pending home sales down you say? Must be all the snow, esp in CA where home sales fell hardest.
Posted by: Van at February 20, 2014 12:47 PM
I've been a lurker on this site for a long time. I am not a real estate professional. I do not understand how prices (in SF proper, particularly) can be sustained in a rising interest rate environment.
If rates rise from 4% to 6%, for example, then the interest portion of a mortgage payment should rise by 50%. I understand some portion of that is offset by tax savings. Assuming that prices are governed, in part, by what monthly payment buyers can pay, it seems that prices would have to decline substantially for buyers to be able to afford the mortgage. And, of course, 6% is historically low. If it rises to 8%, then we are talking about a 100% increase in the interest portion of the mortgage.
Certainly some buyers will be all cash or similar that can avoid a mortgage, but not all. So, unless the fed keeps rates low forever, it seems prices will have to decline. Please educate me -- what am I missing?
Posted by: Didoson at February 20, 2014 2:29 PM
Didoson-- Some commenters here believe there is a bottomless pool of freshly-minted techie millioniares to keep the bubble blowing.
Good thing those tech companies don't have to abide by GAAP, otherwise, all those profitless companies generating all the millionaires would be forced to close, and the only people left to buy property would be capital-flight Chinese and private equity firms (the latter of which I have been admonished here don't factor into Bay Area RE).
The bubble boosters see facebook's $19 billion buyout of Whatsapp and think that means higher SF RE prices.
The rest of us see facebook's $19 billion buyout of Whatsapp and wonder how much the taxpayers are going to get soaked for this clusterf&ck boondoggle.
Posted by: two beers at February 20, 2014 3:01 PM
We happened to get per-approved Nov 2012. Jumbo loans had a higher interest rate and we were going to use a conforming with an interest only second as the cheapest option.
As prices exploded each week we looked at some point (Jan 2013? it is all a bad memory) our mortgage guy called me up and said, "Jumbo, no problem, rate is lower than conforming, borrow as much as you need, bro"
Posted by: zig at February 20, 2014 3:16 PM
"all those profitless companies generating all the millionaires"
yes, like Facebook, Google, Genentech, Apple - no profit amongst them. good thing they don't 'abide by GAAP'.
Posted by: R at February 20, 2014 3:19 PM
reportedly Twitter has created 1600 millionaires and no profit.
Posted by: money for nothing at February 20, 2014 3:31 PM
^ well, I had been a bear from 2005 to 2010 and have had a very similar train of thought about bubble markets, but I have learned not to compare SF with the rest of the country.
For one, there is a critical mass of tech money that we cannot deny in the BA. A local company with 1B users globally purchases another local company with 400M users globally for 19B, including 3B in retention money. That's a lot of created wealth, distributed from consumers and investors into a much smaller pool of workers who are mostly local. Yes it's crazy and very few today can wrap their heads around this amount.
Next thing: There is structurally very little for sale in SF, and part of this has to do with high desirability and artificial scarcity. This scarcity is caused in lesser part to the fact that only 40% of units are owner-owned (with very little chance this will change anytime soon), and in greater part due to prop 13 which acts as a crazy glue for medium/long-term owners.
Say you're in Everywhere, USA with 100 houses: 5 are for sale a year while 5 buyers are shopping that same year, you'll have a balanced market and prices will represent what people can afford in this area.
Now consider SF where for 100 houses you have 2 for sale and still 5 buyers shopping, the market will adjust prices and only the 2 wealthiest buyers will be able to purchase. In SF, those 2 wealthiest buyers happen to work in tech with tons of cash.
Posted by: lol at February 20, 2014 3:34 PM
F-book is paying $19 gazliion for a company that earned $20 million last year in revenues -- not even in profit.
Poorly-monetized and business-plan-challenged F-book is more akin to profitless wonders like yelp and groupon than to the other legitimate businesses you cited.
Posted by: two beers at February 20, 2014 3:44 PM
Yes, clearly FB has no idea what in hell they are doing.
That's why profits rose so much last quarter.
Posted by: R at February 20, 2014 4:28 PM
whats app has over 450M users. thats a lot of potential revenue that a small developer had no idea how to mine. they only paid $42 per user and can gain way more than that in a few years
Posted by: the wolf at February 20, 2014 5:09 PM
If interest rate rises 50%, monthly payment does not rise at the same rate.
Based on $500k loan over 25 yrs, a 50% increase in interest rate (4% to 6%) produces a 22% increase in monthly payment.
The time seems to be the biggest factor, with monthly payment only rising approx half as fast as the interest increase (22% vs 50% in the example above).
Posted by: jimbo_in_sf at February 20, 2014 5:26 PM
Re: Didoson: maybe we are the only ones in the Bay Area in this situation but I doubt it: while the interest rate has and had a small effect on what we could buy, by far the bigger effect was the cash we could raise for the down-payment. Our incomes could support much more house than we bought, so a tick or three up in interest rate was not what kept us searching for the last 18 months - the problem was lack of inventory & the time it took for us to save 150k (2 years). I'm not saying that prices will go up forever, but it seems like as long as inventory is low and wages are high, there will be buyers even if interest rates go up.
Posted by: REaddict at February 21, 2014 6:25 AM
RE the FB/whatapp story...keep in mind that whatsapp actually does have a recurring revenue model: free download and use for the first year, then $0.99/year after. Seems meaningless, but given their current user base and how sticky whatsapp is, it's easy to see how they could generate $500mm in revs (mostly pure margin) within a year or so given their rate of growth and have close to zero churn.
Posted by: no_ vally at February 21, 2014 8:03 AM
REaddict, we had the exact same problem. Our incomes could support a much higher house payment--the down payment was what limited our purchasing power. This was especially true because there are so many cash buyers that sellers want to see more than 20% down, and because what we could afford put us in a place that needed a lot of work (for which we have to pay cash). And "needed" is not an overstatement--as one example, the bathroom did not have water coming out of the fixtures, meaning the walls had to be ripped out to identify where the water was going, exactly.
It's hard to believe that this kind of market is sustainable because it seems so insane, and yet the bidding wars we suffered through before we bought suggest there is still massive unmet demand. There were 12 competitive offers on our dumpy condo. We got it, so we're now out of the market, but there has been nothing even remotely comparable in the neighborhood listed since, so where do the other 11 people go? Their choices seem to be to keep bidding prices up even further, or hope they can stay in a rental (if they have one). We were being kicked out of our rental, so I suppose we were the most desperate that time around.
Posted by: jordan park at February 21, 2014 1:21 PM
Posted by: SocketSite at February 21, 2014 2:41 PM