We all knew it was only a matter of time before record-low mortgage interest rates began to rise once again. And it looks like that time is here.


Over the past month, Fed Chairman Ben Bernanke has hinted that the Fed’s aggressive bond-buying program, which has kept rates artificially low, could end sooner rather than later. This week he left no doubt when he announced that the Fed will begin “tapering” its bond purchases later this year and end them completely next year.  Will QE-3 be the final chapter of the Fed’s bond purchasing efforts known as Quantitative Easing?


Just the mention of “tapering” sent the stock market to its worst two-day decline of the year and pushed 10-year treasuries to their highest level in nearly two years. Since 10-year Treasury bonds bottomed at 1.4 percent last summer, rates have risen more than 60 percent to 2.4 percent.


Long-term bond rates help drive mortgage rates, so it’s not surprising that mortgage costs have ticked higher in the past month as well. The average 30-year fixed-rate conforming mortgage has climbed to 4.17 percent, the highest rate since March 2012 and the sixth straight weekly increase, according to the Mortgage Bankers Association.


What does all this mean for potential homebuyers, sellers and the housing market? The good news for buyers is that although interest rates have edged higher, they still remain extremely low by historical standards – at least for now. As the Wall Street Journal said in its recent headline, “Mortgage Rates Rise but Still a Bargain.”


But those buyers who have been sitting on the sidelines might want to step up their plans and get into the market before rates go up even further.


In talking with our local offices, it seems that many buyers have gotten that message and are accelerating their search activity. The challenge, of course, is that while inventory is gradually increasing in some areas, there still isn’t enough to meet strong buyer demand in many communities.


I’m certain that the recent bump up in mortgage rates is just what we needed to get the last of the indecisive buyers off the fence and into the market. But the REAL question is whether they’ll be joined by more sellers, who have just as much to lose as buyers by waiting for rates to go higher. For our potential sellers who have been waiting for prices to hit a peak, we know this much for sure:  As interest rates rise,  there will be fewer buyers and eventually lower demand as interest rates creep up, at any price point, for those depend on financing for a home purchase. The rise in interest rates lowers purchasing power.  Buyers are limited in how much they can spend, which translates into size of home, preferred location, and condition/ amenities. As you’ll see below, we are already seeing fewer multiple offers in many markets.


Below is a market-by-market report from our local offices:


North Bay – The Marin real estate market continues to be robust with its sweet spot between $500,000 and $1,500,000.  While things have seemingly tapered off after graduation, father’s day and the beginning of summer, we are still getting new listings and putting sales together. It’s a good healthy market.  Prices continue to rise, multiple offers continue to frustrate buyers and delight sellers.  In Novato, there are only 64 single-family and 9 condo active listings right now – in a town of 50,000.  Most of those are at higher price points – anything under $650K is flying off the shelves.  Multiple offers are still the norm and the buyer demand remains fierce at all price points.  Buyers are generally having to make 5-6 unsuccessful offers before realizing what is needed to get the house – over asking and short contingencies or cash. More listing are coming to market to satisfy the many hungry buyers, our Sebastopol manager reports. Multiple offers and over bids are still standard.


San Francisco – According to our Lakeside office manager, multiple offers are common, but agents are beginning to talk about fewer numbers.  Buyers are still lining up to make offers on the most attractive and attractively priced properties, but they are starting to worry more about over paying. Our Lombard manager notes that there’s also been some talk of a cooling market, but then up pops 15-20 offers on a property. There’s been a slight uptick in inventory and a larger Broker Tour. SFAR reported this week that YTD 62.8% of listings have sold over asking, averaging 105% of list. Also this week a couple of refreshing solo offers that went back and forth through three counters (like the old days). The SF summer slowdown has officially begun, our Market Street manager says.   Agents still continue to see listings receive multiple offers, but the “frothiness” is a bit subdued.  So rather than 20 offers on most properties, they’re seeing two to six offers.   And even though they still don’t have enough listings to meet demand, many sellers are choosing to hold off until after Labor Day to introduce their properties to the market.   It’s a GREAT time to be a seller — high buyer demand, and fewer competing homes. Our Sunset office reports that there has been a slight increase in listing inventory recent weeks but not enough to satisfy demand.  Open houses are still very well attended with 100 plus group during the first open house on new listings.


SF Peninsula — The Peninsula generally has a truly critical shortage of available homes. Millbrae stands at just nine active listings, Foster City at five, Redwood Shores at two, Belmont at eight, Burlingame at 23, San Mateo at 50 and San Carlos at 20. One South San Francisco listing received 35 offers! The rising interest rates will surely impact how this market goes forward as buyers are seeing their buying power eroded. Hillsborough has slowed slightly over the last few weeks, probably due the end of the school year and graduations. The active inventory is the largest of any of the peninsula cities at 58 listings and 16 pending sales. This wonderful community remains one of the very best buys in the Bay Area for location, lot size, home size and schools. One new listing recently sold over $5 million in a pre-emptive offer. Open houses are still busy but buyers are more reticent – could be buyer fatigue, our Menlo Park manager notes.  Interest rate creep will drive them back into the market she believes, although some are scared of the ‘B’ word  (bubble). Our Redwood City-San Carlos manager says that buyers are aware that they will need to consider the list price as simply a starting point due to the tight inventory. Unfortunately, she said, in some cases sellers are only looking for the highest price and not totally taking into consideration terms and conditions. Sales in the Woodside-Portola Valley manager continue to be strong in the under $3 million segment and in the less expensive surrounding areas.


East Bay – The Berkeley market remains strong with the Previews luxury segment picking up again. Our Oakland-Piedmont manager says that while buyer interest is still high there was a drop in attendance over the weekend. She wonders was it the interest rates or was everyone honoring their dad?  We’ll see how this weekend’s open houses go. The rise in interest rates coupled with the overbidding does have some buyers sidelined in the first-time buyer market. Everything is still going with multiple offers across all price points. Our Walnut Creek manager says that buyers are being more cautious about offering over asking price. They feel they can wait for more inventory to come on the market.  Cash offers are still prevalent.  On lower end homes agents are seeing multiple offers including many of cash investors.


Silicon Valley – The Cupertino area is still a great sellers’ market. The number of multiple offers seems to be decreasing, but things are still getting bid way up in the immediate area. Our Los Gatos manager says that renters are continuing to investigate the idea of purchasing rather than renting. The San Jose-Almaden market seems to be slowing in the terms of multiple offers.  One agent recently sold three homes and none were multiple offers.  They weren’t pre-emptive offers either. That assessment is echoed by our San Jose Main office, which suspects the slight cooling in the market is possibly due to the increase in interest rates. Open house activity is still brisk in all price ranges though. Santa Clara County single family and condo inventory is up slightly for the week. Our Willow Glen manager reports that overall market conditions have leveled a bit for buyers there, too. Agents have not seeing the frenzy of overbidding and multiple offers on most properties. Some properties had offer dates set and either received only one or two offers at or slightly above asking price and a few didn’t receive any offers. They are seeing the investor buyer go by the wayside. Most buy side purchases that they are seeing are either the move up buyer or the first time home buyer with 20% down payment. Sunnyvale continues to be red hot, our Saratoga manager says.  One home this week went 30% above asking.


South County – Agents are witnessing, after a long delay, an increase in the number of homes being offered for sale.   Earlier this year the Morgan Hill listing inventory of single-family homes hovered around 50 to 55 units.  As of this week that number was up to 77 active listings.  This increase is giving prospective buyers more choices, though homes that are priced correctly continue to receive multiple offers.   Another interesting fact is that prices have skyrocketed.   In January of 2013 the average closed price (for a single-family home sold by Coldwell Banker, Morgan Hill) was $531,000.  In May, that figure rose to a staggering $637,000—an increase in excess of $100,000 in just five short months.  Increased asking prices coupled with rising interest rates have tempered the market somewhat—changing from a completely Seller dominated market to one that is more balanced.


Monterey Peninsula – The local market continues to hum along at this excellent, steady pace.  Our local manager is seeing a few more listings coming in each week as sellers gain confidence that this has become an opportune time to sell.  Many of the new listings are priced right, then go for a higher amount due to multiple offers, and a good percentage, around 35%-40%, are selling for all cash here.  And because the sellers are not depressed, like they were for a few years past, the escrows seem to be going generally more smoothly, too.


That’s it for now. Have a great week!