US economic conditions are shutting the door on the red-hot residential real estate market in the North Bay, with increasing interest rates contributing to May’s double-digit percentage drop in the region’s home sales, according to the California Association of Realtors.

And this may be just the start of a changing real estate market, thanks in part to interest rates that have doubled since the start of the year.

“The industry was caught very blindsided by that, because all of the mortgage-lending industry and most economists expected mortgage rates to remain in the (3% range) all during this year,” said Nevin Miller, president and CEO of San Rafael- based Pinnacle Loans, which serves Marin, Sonoma, Napa and Solano counties, as well as Southern California. “For them to go from 3% to 6% is a shock to the market.”

The current market still favors sellers, he noted, but that doesn’t mean they aren’t reacting, even with all-time low inventory.

“Sellers who have now got a ton of equity because homes have appreciated so much are rushing to put their home on the market before the market changes, which it is doing now,” Miller said.

In the North Bay, year-over-year property sales in May were down in several counties, according to the agent association. Sonoma County home sales dropped by 22.8% to 385 homes sold; Napa County 12.1% to 102 homes; and Marin County, 10.1% to 178 homes, CAR reported. Solano County sales, however, rose 5.8% to 328 homes sold in May.

This wasn’t surprising to CAR Deputy Chief Economist Oscar Wei, who noted that Solano is the most affordable county in the Bay Area and North Bay.

Insights and cash

In Sonoma Valley, while large overbids on homes have not been unusual, with three-quarters of offers coming in all-cash, the buying frenzy reached out to traditionally more affordable areas of the county, said Duane Margreiter, sales manager for Century 21 NorthBay Alliance in Sonoma. One of his properties was a $1 million home in Windsor, where overbids had previously gone as high as asking $25,000 over, and that property sold for $75,000 over.

“We’re seeing a shift in the market,” Margreiter said. “Buyers are taking a different look. They’re realizing that they do not need to put in an offer on the first thing they see.”

While the rise in interest rates is likely to initially price out first-time homebuyers, overall it likely will result in a shift to a more balanced market, rather than a crash like in 2005 to 2012, when the Great Recession had a wave of foreclosures , Margreiter said.

Patricia Oxman, a 30-year real estate veteran and top producer for Golden Gate Sotheby’s International Realty, said the Marin County market data she tracks suggests local entry-level buyers have already pulled back so far this year, but higher-priced homes continue to be selling.

Sales of single-family homes in Marin County are down 17%, with 1,120 changing hands so far this year, compared with 1,346 in the same time frame last year. Home sales under $1 million have dropped to 72 from 145 a year ago. Sales of mid-range homes ($2 million to $4 million) moved down to 48% of all sales from 54% last year, while top-end homes (over $4 million) now make up 46% of sales, up from 34% a year ago.

“The luxury market is still strong because buyers pulled money out in anticipation of the purchase, and 28% of our sales are all cash,” Oxman said.

Gerrett Snedaker, broker and partner with Better Homes and Gardens Real Estate-Wine Country Group, said he’s seen “a decrease in multiple offers and selling homes in excess of asking prices.” The firm has multiple offices in Napa, Sonoma and Mendocino counties.

In May, 16% of homes in the three counties sold at reduced prices, and by late June that proportion is 19%, in line with the level from a year before, according to Snedaker. And the share of homes selling for over the asking price was 55% in May, 44% through late June and 52% a year before.

Market influences

The changing market conditions have already started to reduce prices on listings.

Just over 9% of Sonoma County listings experienced a price cut in May, compared with 6.9% in April and 4.9% in March, Zillow reported. About the same percentage of sellers lowered their prices in neighboring Napa County, in contrast to reductions in April at 7.1% and 6.3% in March. To the west in Marin County, 6.8% of listings were lowered, versus 5.1% in April and 4.9% in March.

Much of this trend is due to “rising interest rates on the back of the incredible price appreciation in recent years,” Zillow spokesman Matt Kreamer pointed out, adding: “People are being priced out.”

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DUBLIN (KPIX 5) – As interest rates creep up, many thought it would mean some potential home buyers would back off. So far, that doesn’t seem to be the case in the Bay Area’s red-hot market.

March was another record month for California and Bay Area real estate. The median single-family home price in California, in March, was $849,080, according to the California Association of Realtors.

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Here were the median sale prices for single-family homes in the nine Bay Area counties:
• Alameda: $1,430,000
• Con Costa: $965,900
• Marine: $1,737,500
• Napa: $998,000
• San Francisco: $2,060,000
• San Mateo: $2,280,000
• Santa Clara: $1,950,000
• Sonoma: $833,750
• Solano: $604,000

“The headlines are screaming historically high sales prices. The finer print is, people still want to buy homes,” said David Stark, with the Bay East Association of Realtors. “If you look at how long a home was on the market, it’s at historically low levels, which tells us that buyers are not only willing to pay those prices, but they’re willing to pay those prices quickly.”

Mortgage interest rates are rising. However, that phenomenon doesn’t seem to have had an effect on the market yet, according to John Levine, the VP & Chief Economist of the California Association of Realtors.

“Even as rates have really, surged over the course of the last eight weeks or so, we haven’t seen that affect buyer demand for several reasons,” Levine told KPIX 5. “But the bottom line is, we still have ultimately too many buyers and not enough homes to put them in, that’s keeping the market relatively strong.”

In March, for the first time in about two years, the inventory of available homes did not shrink, according to the latest figures.

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“It is significant that we actually have more for the first time in a very long time. We still have a long way to go to get back toward something that looks normal,” Levine said. “But, I think for those buyers in particular who really do want to move forward with those transactions and get in while the gettin’ was good as it were with rates, that’s good news in the sense that they might have a few more options moving forward.”

Bay East President and Realtor Sheila Cunha tells KPIX 5 while the market is still “crazy,” it’s not quite as crazy as it was a few months ago.

“We’re not seeing quite as many offers right now as we did four or five months ago,” she said.

Cunha believes the rising interest rates will ultimately lead to some potential homebuyers backing off, but doesn’t think that’ll happen until the summertime.

“I think it’s coming. I think as the Fed continue to raise the interest rates you’ll see buyers not being able to afford what they once could,” she said.

As for the inventory, she thinks that will slowly start to increase as well.

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“Spring is usually our busiest season,” she said. “I think we’ll start seeing more homes coming on the market.”

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The president of the San Francisco Federal Reserve on Wednesday said the central bank is likely to raise a key interest rate to as high as 2.5% by year end in a bid to help douse raging US inflation.

“I see an expeditious march to neutral by the end of the year as a prudent path,” Mary Daly said in a speech at the University of Las Vegas.

Her remarks suggest the Fed would raise rates at least a few times in half-point increments, perhaps as soon as the central bank’s May strategy meeting.

The central bank views 2.5% as neutral for its short-term fed funds rate, meaning it neither helps nor hurts the economy. The cost of borrowing for a house, car or business loan are influenced by the Fed’s benchmark rate.

The Fed last month lifted its short-term rate for the first time since the pandemic after keeping it near zero during the crisis in an effort to stimulate the economy.

While the Fed’s actions helped shield the US from an even deeper recession, its easy-money strategy also contributed to the worst bout of inflation in 40 years. The cost of living jumped 8.5% as the 12 months ended in February, the consumer price index shows.

A sharp recovery and the return of millions of people to work, however, means the Fed no longer has to support the economy, Daly said. “Moving purposefully to a more neutral stance that does not stimulate the economy is the top priority.”

Daly and other senior Fed officials have signaled they plan to raise rates quickly to try to ease upward price pressures and assure Wall Street DJIA, +0.67% investors and the public that the central bank won’t let inflation continue to run rampant.

“Across the country, Americans are waking up and going to bed worried about whether their incomes will keep up with the rising cost of rent, food, and fuel,” she said.

“Businesses are also worried, thinking twice about committing to long-term
contracts that may become too costly to fulfill if prices continue to rise.”

Yet Daly, viewed as one of the Fed’s more dovish officials, also cautioned that the central bank has to make sure it doesn’t go too far too fast.

“If we slam the brakes on the economy by adjusting rates too quickly or too much, we risk forcing unnecessary adjustments by businesses and households, potentially tipping the economy into recession,” she warned.

By early next year, the Fed will be able to gauge the effects of higher rates, she said. and adjust as necessary. She blamed most of the increase in inflation on disruptions caused by the coronavirus that she expects to fade in time.

More recently, she noted, the war in Ukraine has added to inflationary pressures by pushing up prices of oil and grains such as wheat.

“All of this means that it’s hard to fully know what next year will look like,” she said.

Still, Daly insisted that inflation would eventually subside and return close to the Fed’s 2% target within the next few years.

“I have it at 2%,” she said. “That’s where I think it’s going.”

Daly is not a voting member this year of the Fed’s interest-rate setting panel known as the Federal Open Market Committee.

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The fear that a “very tight” US labor market will demand fuel wage demands is producing a consensus in Fed policy-making circles on the need for a 0.5 percentage point rise in its base interest rate at its next meeting in May, with possible further hikes of that magnitude at subsequent meetings.

Acting US Federal Reserve Chair Jerome Powell announces interest rates increase on March 16, 2022 (Source: CSPAN)

The president of the San Francisco Fed, Mary Daly, is one of those adding her voice to what is a growing chorus for a bigger rate rise than the 0.25 percent (25 basis points) the Fed instigated at its meeting last month.

In an interview with the Financial Times (FT), Daly said the case for a half percentage point rise in May had grown. She was commenting in the wake of the latest data from the Labor Department showing the unemployment rate had dropped to 3.6 percent, the lowest since before the pandemic.

The remarks by Daly are significant because she is generally regarded as one of the more “dovish” members of the Fed’s governing body.

“The case for 50 [basis points], barring any negative surprise between now and the next meeting has grown,” she told the FT. “I’m more confident that taking these early adjustments would be appropriate.”

As with all her counterparts in the Fed, starting with the chair Jerome Powell, Daly is focused on the issue of the labor market. The fear in ruling circles is that inflation is leading to upsurge in demands by workers for pay rises to compensate for the losses over the past two years and more.

Daly said the latest data showed the labor market is “very strong” and “tight to an unsustainable level.”

Her views echo previous remarks by Powell who has made clear he is prepared, if necessary, to take the road of former Fed chair Paul Volcker in the 1980s who lifted interest rates to record highs, inducing a deep recession, to crush wage demands.

Daly did not go that far but, according to the FT, they acknowledged the economy may have to slow to bring inflation back into line with the Fed’s 2 percent target.

The Fed’s interest rate moves have nothing to do with bringing down price hikes. They will not reduce the price of oil, lower the price of food and other necessities, or free up global supply chains, impacted by the refusal of governments internationally to take action to eliminate the pandemic.

Higher interest rates are aimed entirely at the working class, with the objective, as Powell has put it, of bringing back the demand for labor in line with supply—that is, by slowing the economy and lifting the jobless rate.

Other members of the Federal Open Market Committee, the Fed’s interest rate setting body, want to go further than a one-off 50 basis point rise. Their ground was staked out by James Bullard, president of the St Louis Fed, who dissented from the 25 basis point increase in March and called for a rise of 50.

In an article last week entitled “Expectations grow that Fed will deploy jumbo-sized rate rises,” the FT noted predictions by Morgan Stanley that the Fed will deliver back-to-back 50 basis point rises starting in May, followed by 25 basis point adjustments at each of the four subsequent meetings for the year. These rises will accompany moves by the Fed to start winding back its holdings of nearly $9 trillion of financial assets which will add to upward pressure on market interest rates.

Citigroup has forecast four 50 basis point increases by the Fed at each of its next four meetings, so that the Fed rate reaches 3 percent by the end of the year.

Summing up the expectations last week, Simona Mocuta, chief economist at State Street Global Advisors, told the FT: “The signaling clearly has been very much on the hawkish side for some time, but that has gotten to a fever pitch in recent days. ” State Street Global Advisors is the investment management division of the State Street Corporation, the world’s fourth largest asset manager.

The expectation of higher Fed rates has led to the phenomenon of yield curve inversion where the rate on shorter-term Treasury bonds rises to a level higher than that on the 10-year bond. Under normal circumstances the rate on the longer-term debt is higher than the short-term rate because lending longer term involves greater risk and uncertainty and therefore demands a higher rate of return.

But last Friday the rate on the two-year Treasury bond reached 2.44 percent while that on the 10-year was 2.38 percent.

Yield curve inversion is regarded by many market analysts as a warning of a forthcoming recession as investors consider that the Fed has pushed up interest rates to levels that will induce a credit squeeze, leading to a recession and lower rates in the longer term.

Previous recessions have often been preceded by a yield curve inversion. Whether it takes place on this occasion remains to be seen. Experience is an increasingly uncertain guide because of the transformation of the US financial system as the result of 15 years of “quantitative easing” (QE). The Fed has pumped in trillions of dollars into the market, first after the crisis of 2008 and then following the market meltdown of March 2020 at the start of the pandemic.

The Fed is now treading a fine line. On the one hand it wants to raise rates to clamp down on a wages upsurge, while on the other it is fearful that a too rapid rise will bring down the financial house of cards it has created by its low interest rate and QE regime.

The actions by the Fed will have international ramifications as central banks around the world also move to lift rates to counter wage demands. It will also exacerbate the already large debt servicing problems for many developing economies and so-called emerging markets.

The class agenda driving central bank and monetary policy was indicated by former Treasury secretary Larry Summers in an interview with Bloomberg over the weekend.

Summers, who often indicates the thinking in financial circles—he was one of the first to take issue with the Fed’s claim for much of 2021 that inflation was “transitory”—pointed to the effect of higher rates on government debt.

He began by denouncing the call for a so-called billionaire tax as a “bad idea whose time will never come” and then turned to the issue of government debt. The very low interest rates being used to calculate its impact “look comical today.” With the ratio of government debt to GDP now at more than 100 percent, Summers said using more realistic rates would likely add 5 percent to the debt to GDP ratio.

This raises the ever-growing question of how the debt will be paid and, having ruled out tax rises, Summers left no doubt about where the ax should fall.

“We’re moving towards a moment when we’re going to have to start to think about fiscal policy as well as monetary policy as an anti-inflationary tool,” he told Bloomberg.

The cuts will come not through any reduction in military spending which has risen to record highs, a move Summers fully supports, but on vital social spending which hits the working class.

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Bernardo Silva has been linked with a move to Tottenham but the Portuguese midfielder has no intention of playing for the Lilywhites, according to The Athletic.

Manchester City are keen to sign Harry Kane and they have included Silva as a sweetener in their first offering for the English captain.

Tottenham turned down the offer and they were able to add more money and come back with the same player.

City has already informed Silva that he can leave the club this summer if they receive an offer worth considering.

The midfielder would be a good addition to the Tottenham squad. However, he said he was not interested in moving to London.

Instead, he wants to play in Spain next and, according to the report, his agent has held talks with the Premier League champions to find a suitable solution to the current problem.

Tottenham are still determined to keep Kane but the striker is just as keen to leave him.

Spurs will sell him if City makes an offer they can’t refuse, and it seems they prefer a bar-only deal as well.

It will be a long 12 days for the transfer window to close and it would be no surprise if something happened at the last minute.

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