Forecast: Could Low Rates Give Bay Area Housing Market a Boost?

Key highlights from this report:

• Bay Area housing forecasts are difficult at a time like this.
• The real estate market continues to surprise and even baffle analysts.
• Home prices and sales are still strong in many cities, despite COVID-19.
• Low mortgage rates could boost Bay Area home prices in 2020.

Bay Area Housing Market Outlook

What’s the forecast for the Bay Area housing market through 2020 and into 2021? Good question! We’ve entered an unprecedented time when real estate market predictions and forecasts have become increasingly difficult to issue, even by full-time economists and housing analysts. The phrase “uncharted territory” comes to mind.

The Bay Area real estate market, in particular, is full of surprises. Home prices in many cities across the region continue to hold up, despite the economic turmoil caused by the coronavirus (COVID-19) pandemic.

According to the latest data from Zillow, the median home value in San Francisco rose 3% over the past year or so (as of late July 2020). The median in nearby Oakland rose by 5.7% during that timeframe. Hayward’s median home price rose 3.3% over the past year, according to Zillow. You get the idea.

Many housing markets in the Bay Area, in California, and across the nation have even seen home-price gains over the past few months, despite the ongoing pandemic. And sales activity remains strong as well.

Consider this recent report by CNBC, based on data from the National Association of Realtors:

Pending home sales [nationwide] continued to climb in June, rising 16.6% monthly since May, and increasing 6.3% since June 2019, according to the National Association of Realtors. This beats the expectation for the monthly gain, which was a rise of 12.5%. It’s the second straight month of increases in contract activity.

Lawrence Yun, NAR’s chief economist, rightly described this trend as “quite surprising and remarkable.”

That’s nationwide. Here in the Bay Area, single-family existing home sales rose by a whopping 69% from May to June of this year, according to the California Association of Realtors’ June sales report.

Record-Low Mortgage Rates Are Fueling Demand

There are several factors contributing to the Bay Area housing market’s surprising strength. We outlined five of them in a recent blog post. Today, we’ll focus on one factor in particular. Low mortgage rates.

Earlier this month, the average interest rate for the popular 30-year fixed mortgage fell below 3% for the first time in history. That’s noteworthy in its own right. In 50 years of record keeping, that had never happened before. Some forecasters predict we could see even lower rates over the coming weeks and months.

So what does this have to do with the Bay Area housing market forecast mentioned earlier. Plenty! If rates continue to hover near 3% — or even dip below that level — it could boost home prices and sales across the Bay Area.

As a July 28 Forbes article put it:

“As the Federal Open Market Committee (FOMC) prepares to meet this week, mortgage borrowers are facing some of the lowest interest rates in history. The housing market is heating up—driving home prices higher—after a slow spring season.”

The FOMC mentioned above is the Federal Reserve’s decision-making policy group. That group met this week and decided to keep the short-term federal funds rate near zero, a decision that will have an indirect influence on mortgage rates.

Fed officials said they plan to maintain this policy until they are “confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

Translation: Rates will likely remain low for the foreseeable future, certainly through 2020 and into 2021.

It’s a Supply and Demand Story, as Always

Record-low mortgage rates are fueling the demand side of the Bay Area housing market, encouraging home buyers to move forward with their house hunting plans in spite of the pandemic. And this comes at a time when there are lingering constraints on the supplyside.

Even today, several months into the pandemic, there just aren’t enough homes listed for sale to satisfy the demand from buyers. And that’s putting upward pressure on home values across the region.

To be clear, the Bay Area real estate market has certainly been affected by the coronavirus pandemic. The ongoing public-health crisis has had a cooling effect on what would normally be the hottest time of the year for buyers, sellers and agents. But at the same time, the housing market has shown surprising resilience. Here’s hoping it continues through 2020 and into 2021.

Disclaimer: This story offers a Bay Area housing market forecast based on current conditions within the real estate market and broader economy, conditions that could change over the coming months. Housing forecasts are the equivalent of an educated guess and should be treated as such.