As predicted, the Federal Reserve has just raised its benchmark Federal Funds rate, upping its target range by another 0.25 percent (25 basis points) and signaling accelerated expectations for two more quarter-point increases by the end of this year, which is one more than previously expected.

The Fed dropped the benchmark rate five (5) percentage points between August of 2007 and the end of 2008, a move which helped drive mortgage rates down to an all-time low of 3.31 percent in 2012. The Fed has since raised its target by a total of 1.75 percent.

The yield on 10-year Treasury notes, which drives the 30-year mortgage rate, is currently trading up a basis point or two since the Fed’s announcement. And as of last week, the average rate for a 30-year mortgage was running around 4.56 percent with the probability of a rate hike today already priced-in.

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Comments from “Plugged-In” Readers

  1. Posted by Tipster

    30 year fixed. 4.81 APR. Wow.
    5/1 ARM 4.082

    It looks like the days of savers subsidizing home purchases are finally coming to an end. A property worth $2M in 2015 would now have to be sold for $1.6M to make the same monthly payment+property taxes after deductions.

    Even a 2011 buyer would have to sell for less to allow the purchaser to make the same payments+property taxes as the 2011 buyer.

    • Posted by Anonoly

      True, but will how much of an effect will increased rates have in the cash rich Bay Area. My guess is none. As long as tech booms, Bay Area RE prices will climb.

      • Posted by anon2

        So what calamity of the tech industry has caused all the ‘bad apples’ that we’ve been seeing?

        Do you not find it odd that the trajectory of our housing prices has generally followed that of many other cities which do not have a strong tech industry?

        • Posted by Anonoly

          We may be seeing a few ‘bad apples,’ but there has been no wide spread decrease in prices here. Some counties, such as San Mateo and Santa Clara, are up year over year. San Jose is booming due to Goolgle’s planned downtown campus.

          [Editor’s Note: There has certainly been some bifurcation in the Bay Area market as a whole.]

          • Posted by anon2

            The difference between no bad apples and one bushel raises the question of how or if bad apples can happen. The difference between three bushels and four bushels raises the question of how many bad apples will occur.

            We’ve already gotten an answer to ‘how can prices fall’, because they already have. The only question now is where and to how many apples will the rot spread too.

            It doesn’t seem surprising that areas with high investor interest and areas with more condo’s and more high end properties would turn first.

            It’s possible that long term, some areas will turn down while others decouple. But that’s a tough case to make.

          • Posted by Ohlone Californio

            When is there ever no bad apples? Meaning zero? When does that ever happen in any market? That’s an absurd point.

          • Posted by anon2

            I’d be surprised if you could find any significant number of places selling apples to apples lower during the fullness of the last two up-cycles. And the poster above literally said: “As long as tech booms, Bay Area RE prices will climb.”

            It was not too long ago that many people here were arguing that we’d never see a price slowdown, let alone actual losses. And then someone drew a line in the sand that we’d never see 2017 pricing, then 2016 pricing.

            As the posters below call out, many people believe that housing does not drop here: “To a person, everyone I know who are serious about buying (a small group of maybe about maybe a dozen) believes that SF housing only races higher and nothing will change that.”

            And the logical conclusion of believing that there is no risk is to get in as deep as you can (““Buy as much as they can” … always the mistake of the greedy to stretch themselves and afford little or no backup emergency funds.”)

            Thus are the seeds of the RE cycle sown.

          • Posted by Ohlone Californio

            Anyone who has followed this site for any appreciable amount of time would beg to differ as far as down apples in bull markets. They happen. And one reason they happen is when purchase competition meets subsequent life changes, and it’s simply not an infrequent thing in a town such as this one. Beyond that though, you seem to keep on trying to stand upon bold statements that are merely distilled paraphrases of things you say someone said and whatnot. It’s really hard to take that sort of writing as anything but unsubstantiated opinion. Though I do appreciate the polite manner with which you express yourself, I simply don’t think you’re making strong points.

          • Posted by SocketSite

            While we’ve certainly published examples of “down apples” in the tail end of bull markets, which, while frequently dismissed as “cherry picked outliers” (over, and over, and over again) were subsequently revealed to be leading indicators of the market’s shift, we’ll bite as to whether one could pick any apples that fell between 2003 and 2006 or 2012 and 2015, in the strikingly similar bands when even quick flips could fetch six figures more.

          • Posted by Ohlone Californio

            OK I’ll take your word for it. I seem to remember them popping up here and there during 2006-ish which was in the middle of a bull market. Regardless, they happen obviously. And they’re not really happening right now with any sort of frequency or regularity that I can discern.

    • Posted by Dave

      This is somewhat baked into the books. Still, it will exert downward pressure on prices. The bigger factor is that, for more and more well paid techies, the prices are becoming unaffordable. That is a bigger factor in leveling prices. In my area well paid techies (300K plus/year) have purchased in the past year as they can no longer afford tier 1 areas. The prices have gone up so much (per Zephyr about 15.6% this past year in Miraloma Park) that this area is becoming hard for some techies to get into. A home (fixer upper) sold a few doors down from me for 1.35 million a few weeks back. It needs 250K of work. The highly paid young couple who purchased it barely could. A lot of help with the down payment from family members is the only way they were able to make the purchase and they also will indefinitely delay much of the needed work. As more and more of SF becomes unaffordable to all but the highest paid techies and professionals prices will flatten. There are just not enough of those flush with income/down payment money to keep the “boom” going.

      • Posted by cleverpunhere

        The other thing happening is that more and more of these folks are buying in the less expensive neighborhoods that they would not have considered a couple of years ago. If that trend continues, those neighborhoods will appreciate very quickly.

        • Posted by anon2

          Last time, as is looking like this time, the low end overshoots on the way up and then on the way down. Being late to the party, Levering up at the end of a cycle to get into a damaged or inferior product. Later turns into “They paid how much…. For that???”

        • Posted by Sabbie

          The lesser neighborhoods in SF are no less lesser because some people overpaid for homes there. Lots of them got bamboozled, I know a couple that moved from the East Coast and the realtor told them that the Excelsior was “up and coming” haha, they are not very happy right now.

          • Posted by Davester

            Really – check out 98 Ina Ct. Under contract in less then 2 weeks and $350k over ask.

            Excelsior is not the most “desirable” due to the weather, lack of proximity to downtown, ugly architecture, mass storage of cars by neighbors and not a super commercial district. On the other hand you have:

            – can walk to Bart in 20 minutes
            – be on 101 or 280 in 3-5 minutes
            – SFO in 15 minutes or less
            – Great parks – McLaren & Crocker-Amazon
            – Mostly single family homes and lower density
            – Generally no homeless

            So given my place has appreciated ~33% over the last 3 years I’m not complaining. My advice to your friends would be to appreciate it for what it is as it will never be SOMA , the Castro or Noe Valley. With time the commercial strip should improve. In the end almost everything on the peninsula that is a single family home will start at 1 million and this neighborhood is no exception.

          • Posted by SocketSite

            While 98 Ina certainly sold quickly and for $350,000 “over asking!” at $700 per square foot, keep in mind that the above average home with views had been priced at $490,000 under market, based on the prevailing price per foot for an average home in the neighborhood ($765).

          • Posted by Ohlone Californio

            Some quote unquote “lesser” neighborhoods are actually changing though.

            Look at Ingleside, for one. Ocean Avenue has seen a lot of gentrification changes. I could point to Mission Terrace as well. Nowadays, being adjacent to Glen Park BART and freeways, yet having actual neighborhood feel and Spanish Colonial architecture has given the area an appeal of its own.

            Point taken regarding the Excelsior. But on the other hand, is there much reason to doubt Mission street will get more amenities over time?

          • Posted by Sabbie

            Ocean Ave. and 3rd Ave. have seen a little gentrification, but I think that’s because there is a younger demographic involved. The other commercial areas in D3/10 have been surprisingly slow to change, especially given the rapid appreciation in home values. Maybe because it’s families that are buying those $1.5m homes and they don’t go out very much or want their kids around the street life.

          • Posted by Ohlone Californio

            Ocean has seen more than a little gentrification, actually. It has seen a lot of gentrification.

            Do you mean 3rd st? OK, yes, it has undergone a little gentrification so far.

    • Posted by that_dude

      Not sure what you mean by the 2011 buyer.

      I bought a property in 2011 my price was $630k. Current price: 1.5m. How exactly would a “2011” buyer lose money?

    • Posted by Ohlone Californio

      They’re still low rates historically.

      This city’s trajectory is similar to some other cities, true. Some.

      • Posted by anon2

        What people see and experience first hand is visceral and real. So people vastly overweight some of the micro and sub-micro level details. During the 2007 up-cycle, you could find people all over the country that would swear that what was happening in their neighborhood was solid and real. A young couple moved in down the street, the neighbors repainted their house, a new coffee shop opened up…

        People make up narratives to explain what they see going on, but sometimes if you step back and take a wider view these piecemeal narratives fail to explain the bigger picture.

        A time when you and your buddies got drunk and pissed off the edge of your boat may make a memorable and long lasting bar story, but that isn’t what drives the tides and currents of the bay. It’s deeply un-intuative that some rock 240,000 miles has more influence on the tides than something right there in front of you, but that’s the way things work.

        • Posted by Ohlone Californio

          I am pretty sure you feel as if you made some sort of point there but I don’t know what that point might be.

          • Posted by anon2

            Maybe some of the people below said it better. But the point is that most people chronically over focus on minutia and oddball occurrences. Things that are great for forming a narrative or newspaper story, but aren’t really driving forces for major economic shifts.

            Interest rates affect all borrowers and also change the opportunity costs for cash buyers as people point out below. And even outside housing, forcing interest rates lower goads people into seeking yield in riskier assets. Interest rates and price momentum are tidal forces that raise or lower all boats.

            Some of the stories that some commenters focus on here and elsewhere are more akin to drops of water in the ocean. Either to insignificant or too uncommon to explain much of what we’ve seen going on. (Home is on a busy street, closets too small, teenage Google millionaire, …)

          • Posted by Ohlone Californio

            I’d suggest that you are focusing on a few bad apples here and there as opposed to general trends, actually.

  2. Posted by Markets_arent_a_panacea

    and yield curve inverts and recession happens. the fed is in the unenviable position of essentially having to create the next recession in order to have the tools to fight it imo. bad things happen when interest rates go too low. the big question is will the impact be only to equities or sf real estate too? will be really fascinating to see how much the next recession will impact sf and sf real estate.

  3. Posted by bender

    In June 2011 NASDAQ was around 2800. Today its at record highs, 7755, nearly three times the 2011 levels. I’m guessing that has more impact on bay area housing prices than a 0.5% increase in mortgage rates since 2011 to 4.8%, which are still at very low levels historically.

    • Posted by SocketSite

      Keep in mind that while 30-year mortgage rates have only ticked up 1.21 percent points since dropping to 3.41 percent back in 2016 (or 0.66 points since 2011), that’s actually a 35.5 percent (or 16.6 percent) increase in the rate.

      • Posted by bender

        Okay. But a rise from 0.1% to 0.2% would be a 100% increase in the rate. That’s totally meaningless. It would still only be 0.1% higher. Mortgage rate are still very low today, although I agree they are less very low than in recent years, while prices for tech stocks continue to go nuts.

        • Posted by SocketSite

          Enter that as Exhibit A for how mathematical mistakes and misrepresentations are made. While a 0.1 percentage point increase might seem “totally meaningless,” and would certainly have less of an impact on a larger base rate, it would effectively double one’s required payment for the same loan if it doubled the previous rate.

          Fortunately, no one has ever bought, sold or valued real estate based on a comparison of the payments required for said purchase. But as you said, rates and their resultant required payments remain relatively low, today.

          • Posted by bender

            As for mathematical mistakes and “doubling one’s required payment,” that’s not how the math works. Here are the numbers for a 30-year $1 million loan:

            At 0.1% the monthly payment is $2820. At 0.2% the monthly payment is $2862. So maybe not “totally” meaningless, but pretty close to it.

          • Posted by SocketSite

            Damn, rather than dealing with reality, we should’ve loaded up on those hypothetical 0.1 percent 30-year loans! And the real change in payments when dealing with a “meaningless 1.21 percent” change from a 3.41 percent to 4.62 percent rate?

          • Posted by Anon123

            Or you could get an interest only mortgage – at 0.1% many more buyers could afford a mansion even if they would never actually own the home.

  4. Posted by bender

    Well, you were the one that argued doubling the interest rate would result in doubling the payment. That was just wrong. Math is hard. That 35% increase from 3.41% to 4.62% increase results in a little under 16% higher loan payment amount per month. And the rate increase from 2011-present was only about 0.5% or 0.6% depending on the reference dates. My only point was a near tripling of NASDAQ since 2011 has dwarfed the effect of that small rate bump, contrary to Tipster’s “Wow! The sky is falling!”

    • Posted by SocketSite

      That was certainly our mistake for taking the bait with respect to a counter factual hypothetical (and decoupling the word interest from payment).

      Which brings us back to reality, where a meaningless “1.21 percent” increase results in a 16 percent increase in the (total) monthly payment for the same loan and said impact on the actual market at hand.

      ps – the average 30-year rate was actually closer to 4.5 percent in 2011, an average which dropped to 3.36 percent in the fourth quarter of 2012.

  5. Posted by anon2.5

    Wish i’d taken the 30 year fixed at 3.625 instead of the 5/1 at 2.875 at the end of 2015. $1.1 million loan.

    • Posted by Oaklandlover

      I took a 5/1 at 2.75 also at the end of 2015….but only on a 380k loan. But the plan all along was to pay it off in 5 yrs which is still the plan and I’m about halfway through it. Now, If the stock market tanks 20%-30% I’ll change the plan on the remainaning ~200k loan balance and plow into stocks.

      When the ARM kicks in in 2020 I won’t be overly concerned to have 100-150k refid at 4-5%, especially if I’ve been loading up on cheap equity as the herds exit the stocks in fear.

      On the other hand if the economy tanks then interest rates will go back down and refi will be cheap, so the situation looks good from most angles.

      If the stocks keep climbing ok I just pay off the loan and then have tons of cash flow waiting for the eventual stock crash.

      Obviously I’m missing something here this a large cash cushion just in case I get fired, lol.

  6. Posted by anon

    There are so many knock-on effects of higher rates other than just monthly payments.

    The backdrop of unprecedented, experimental ZIRP and $4.5T in QE: The gov’t did not want you to save. It forced money out of fixed income and cash equivalents into risk assets. Buy stocks, buy a house or two, search for yield in unconventional places. Do it with the insurance that the Greenspan put has been institutionalized. As long as we don’t have inflation, rest assured that any dip in any market is a buying opportunity because if bad things happen, the Fed will rescue stocks or housing etc; thus risk premium disappears and momentum generates its own momentum. Rate resets never happened. Unconventional institutional money flooded into VC’s which then flooded a lot of companies that have no hope of ever making money. Yes, the Nasdaq rallied- and the SP rallied from 666 in 2009 to about 2800 today. With this backdrop, it is almost surprising that SF housing is not up more. The point being that experimental monetary policy has had a huge impact on SF housing much beyond the low monthly mortgage payments.

    So now the Fed is raising rates and we have begun “quantitative tightening.” But “QT” will be slow- this year there will be $350B in runoff which is a drop in the bucket. But it is happening. So does this mean that not only will people have higher monthly mortgage payments to contend with, but all of these other knock-on effects will unwind and create more trouble for SF housing?

    Who knows but I think that whatever is that whatever is going to happen is going to be very slow. Of the people I know looking for houses right know, yes there are cash buyers, but there are also moderately high two income families looking to squeeze into the maximum they can and then some. To a person, everyone I know who are serious about buying (a small group of maybe about maybe a dozen) believes that SF housing only races higher and nothing will change that. So their incentive is to squeeze into as expensive as place as they can possibly afford as it is a riskless proposition in their eyes. (And people can be remarkably unobjective about all of the fees, taxes, upkeep, renovation costs etc (as well as the opportunity cost) in looking at how well they are doing on their house). Higher rates makes them more in a rush. I think this psychology is hard to break without calamity. These unprecedented monetary policies have fed the view that any dip at all is a time to buy. This psychology is hard to break in stocks as well. Because- with ct10 still a little below 3%, where are you going to put that money?

    But it’s not hard to imagine things being different in a few years. QE run-offs picking up and rates being higher. Higher rates would really be bad for the long-duration tech companies like Netflix and Tesla and higher discounting rates would crush their valuations. CPI is already the highest in six years although core pce is still below 2%. Inflation does not have to be “high.” Core PCE in the mid 2’s would somewhat change the “Fed Put” which would change everything.

    That said, I can see SF housing still going higher for a bit as the psychology is in place, and most of the impact of higher rates will take a few years to play out. But who knows?

    • Posted by Oaklandlover

      “Buy as much as they can” … always the mistake of the greedy to stretch themselves and afford little or no backup emergency funds.

    • Posted by Markets_arent_a_panacea

      for sure. most people have no idea of how uncharted territory we are in taking interest rates to zero.

      interest rates are more than just your mortgage payment and borrowing costs. adjusting them adjusts the risk premium for everything. yet people believe housing will keep appreciating.

      as i said, i could be wrong but lowering interests rates this low almost never has a good outcome.

  7. Posted by GMJ

    The rising rates and QT are going to impact the rest of the US more than Bay Area. People here who are not all cash, will just have to bring MORE cash to the table.

    We have Prop 13, little housing being built, demand for housing high from all over the world and workers here helping to prop things up. What happened in 2008 was that the wrong people (who couldn’t afford homes) were left hold them when the music stopped and a large # of homes in foreclosure and short sale went on the market at the same time that people were losing their jobs.

    The private equity/venture capital boom may quell a bit with higher rates, but the forthcoming AI, AR, VR, Autonomous Driving and all related industry boom will be HQ here for the most part. Also, the younger millennials will be turning 30 in coming years and having some money finally. Gen Z behind them is even bigger.

    Not saying things couldn’t cool down a bit, especially in a recession, but hard to see what would cause a shock. It’s not going to be rates going up another %.

  8. Posted by SFRealist

    If we really decide to start a trade war, as looks more likely, the effect on housing could dwarf increased rates.

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