Lower Mortgage Rates Could Boost Bay Area Housing Affordability in 2023

Housing market affordability in the San Francisco Bay Area declined over the past couple of years, due to a surge in demand and dwindling inventory. We also experienced a spike in mortgage rates that peaked during November 2022.

But now, as we move further into the spring of 2023, there have been some positive developments on the affordability front. Mortgage rates have been trending downward lately, and one recent forecast predicts that this trend could continue.

If mortgage rates continue to decline over the coming months, it could increase housing market affordability for home buyers in the San Francisco Bay Area.

Bay Area Mortgage Rates Drop in Spring 2023

Yesterday, the government-sponsored mortgage buyer Freddie Mac reported the results of its latest weekly survey of the mortgage industry. According to that report, the average rate for a 30-year fixed home loan dropped to 6.28%. This was the fourth week in a row where we saw a decline in mortgage rates in the Bay Area and nationwide.

About a month ago, 30-year mortgage rates were averaging closer to 6.7%. So we’ve come down a bit since then.

This trend could help improve affordability for home buyers in the Bay Area, especially if it continues through spring and into summer of 2023. It could also lure more buyers into the real estate market, leading to a robust spring home-buying “season.”

In fact, the researchers from Freddie Mac stated this very thing in the report mentioned above: “Mortgage rates continue to trend down entering the traditional spring homebuying season,” they wrote.

What Determines Home Buying Affordability?

A combination of personal financial factors and broader market conditions determine housing affordability. On the personal side, affordability can be influenced by a person’s income, recurring debts, and the ability to save up for a down payment. On the market side, we have factors such as home prices and mortgage rates.

Home buyers in the San Francisco Bay area don’t have much control over home prices or mortgage interest rates. But it’s nice to see that some of these factors are trending downward, resulting in improved affordability for buyers.

When measured annually, housing market affordability across the state of California has declined over the past year. As the California Association of Realtors stated in a report published this week:

About one in five of all Californians earned enough income to support the purchase of an $822,320 statewide median-priced home in 2022, down from just over one in four from 2021.

But when you analyze the month-to-month trends, there have been some positive signs lately. This is true for the Bay Area and much of California. We already talked about the recent decline in mortgage rates, which could boost affordability for many Bay Area home buyers in 2023. House prices have also declined in recent months.

According to Zillow, the median home value for the San Francisco-Oakland-Hayward metropolitan area peaked at around $1.2 million during the summer of 2022. But prices have trended downward since then, landing at around $1,086,000 in February 2023. The C.A.R. report mentioned earlier misses this trend, simply because they were looking at year-over-year data, as opposed to monthly changes.

The bottom line here is that housing market affordability in the Bay Area could improve through the rest of 2023, due to lower mortgage rates and home prices.

How to Increase Your Buying Power

If you want to buy a home in the Bay Area in 2023 but are concerned about affordability, here are some strategies you might want to consider:

1. Expand your search zone.

Home prices across the San Francisco Bay Area can vary widely, depending on which market you are in. For example, the median home price for Solano County is roughly half of the median for the broader Bay Area. If you have the luxury of choosing your location, you could greatly improve the affordability situation. So try to consider surrounding areas in addition to your first-choice location.

2. Consider using an ARM.

Adjustable-rate mortgage (ARM) loans tend to have lower interest rates than the more popular 30-year fixed mortgage. These days, many ARM loans start off with a fixed rate for the first few years. After that, the rate can increase based on market conditions.

Some Bay Area home buyers use adjustable mortgages to increase affordability during the first few years of the loan, after which they plan to refinance or sell. This is another financing strategy to consider.

3. Seek a low down payment mortgage option.

There’s a widespread (and unfortunate) misconception that home buyers have to put 20% down. The truth is, some home loan options allow you to put down as little as 3% — or even 0%, if you’re in the military and qualify for the VA loan program. We work with a variety of lenders and can help you find a mortgage option with a low down payment requirement.

4. Use gift money.

Did you know you can use gift money provided by a family member, to help cover your closing costs and down payment? It’s true, and it’s one more way you could overcome the affordability issue when buying a home in the Bay Area.