San Francisco’s unique real estate market may not necessarily be hugely responsive to a drop in mortgage rates. (Courtesy photo)

Market Musings: Mortgage rates are falling again. Does it matter?

The City’s home owners, rather than buyers, stand to gain most from cut

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Last week, an emergency rate cut from the Federal Reserve left benchmark interest rates at historic lows — 1% to 1.25%, if you’re keeping score — which should push mortgage rates down to similarly eye-poppingly low levels and, one would assume, inject some juice into the 2020 housing market. It can’t hurt; that’s for sure.

“Uncertainty in the economy doesn’t bolster a home buyer’s confidence, but knocking money off a monthly payment by getting a lower mortgage rate can certainly help,” Anna Bahney wrote in CNN Business on March 3. Low rates mean cheap money and could be the final push on-the-fence buyers need to enter the chronically adventurous Bay Area market. But as always, nothing is as simple in San Francisco as it is everywhere else.

Low rates mean cheap money and could be the final push on-the-fence buyers need to enter the chronically adventurous Bay Area market. But as always, nothing is as simple in San Francisco as it is everywhere else.

Over the past decade, our market has risen (and risen) seemingly independent of interest rate fluctuations. Though rates have remained low throughout this period and undoubtedly contributed to our robust sellers’ market, their impact has been mitigated by the presence of all-cash local and international buyers, for whom interest rates are of zero concern.

How do traditional buyers compete in a bidding war with the legendary “suitcase full of cash” buyer? By bumping up their own down payments so that the potential pitfalls of a huge loan — including questions surrounding approval and a home’s appraised value — are no longer part of their offer. In doing so, they further marginalize the impact of rate fluctuations on the market.

Word on the street, though, is that all-cash buyers are less common than they once were. How coronavirus fallout will impact the international buyer pool also remains to be seen.

And yet San Franciscans continue to trot out big down payments. Could these historically low rates encourage a trend toward lower down payments if all-cash buyers disappear, leaving everyone else less worried about competing with the big fish? If it happens, that may be their most significant impact on the San Francisco real estate market, more so than any sudden home value increase driven by 3.275% mortgage loans, because mortgage rates are one, but not the, major driver in Bay Area real estate.

If I had a real estate mountaintop, atop which I would sit, cross-legged and in flowing robes, dispensing sage advice, I’d start by telling the huddled masses this: All kinds of things have changed in local real estate since the market roared back to life in 2010, but one thing has stayed the same throughout: available for-sale inventory has remained at historic lows. Inventory is the key to the local market. As long as the overall economy is healthy, real estate is driven by simple supply and demand. Inventory stays low, values stay high.

And how is inventory right now? Still scarce, but less so than in the immediate past. Still, housing supply (which measures the time it would take to empty the market of all available homes at the current rate of sales) finished 2019 on a downward trend, ending the year 24% below the “balanced” figure of three months and indicating a still-strong sellers’ market. If this continues, low interest rates won’t radically alter the market. If there’s not much selection but you really want to buy, a quarter point of interest isn’t going to stop you.

If this is the case, what’s the big deal about lowered interest rates? Well, like I said, they can’t hurt and they will make a difference for some potential buyers.

The real benefits come to present homeowners. If you’ve got a big mortgage and don’t like your interest rate, a quick refinance could save you thousands over the life of your loan, even if your most recent refi happened last year. Even more alluring: the prospect of converting a 30-year loan to a 15-year one without breaking your monthly burn rate bank. Payments on your new, low-rate loan may turn out to be not much higher than they were on your old one. So buckle up, mortgage industry pros; the refi market could go boom this year.

With this, real estate’s low season comes to a close. It’s no accident that the rate cut is timed to coincide with the start of spring — real estate’s traditional sweet spot. But a rate cut alone won’t re-supercharge the San Francisco real estate scene. Several other factors also need to do their part.

The Market Musings real estate column appears every other Wednesday. Larry Rosen is a San Francisco-based writer, editor, podcaster and recovering former Realtor. He is a guest columnist and his viewpoint is not necessarily that of the Examiner.

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