Home Truths, a quarterly report on the state of the Berkeley real estate market, is brought to you by Red Oak Realty.
A few weeks ago, Mary Parker* was considering moving to Berkeley from Scottsdale, Arizona. She and her British-Irish husband, who currently lives in Bahrain, had been planning on retiring in Scottsdale after having lived abroad for 19 years, but for Parker something never felt right about the area. On the other hand, she was familiar with the Bay Area, having attended both Stanford and UC Berkeley and started her career here, and she liked the intellectual atmosphere and relatively good weather. She was contemplating a neighborhood near the Cal campus. But she was waiting to make a move until the presidential election on Nov. 8.
When the results came in, Parker changed her plans. “Unfortunately, Trump’s presidency means moving back to London, UK for us,” she wrote in an email to her realtor, Ana Forest of Red Oak Realty, the morning after the election. “At least until Trump’s presidency is over.”
Such responses have not been unusual in the days and weeks following the election of Donald Trump. Realtors at Red Oak Realty say buyers and sellers have been more cautious — and in some cases deciding not to move at all — because of election-related reasons, real or imagined.
Forest said the election has made buyers “skittish.” She cited an example of a 1,200-square foot, two-bedroom, two-bathroom condo near Jack London Square that was listed for $760,000 before the election.
“Two weeks before the election there was good interest, then the election happened and all showings and interest screeched to a halt,” she said. A few weeks later, however, things seemed to pick up again and the buyer received three offers in one day.
Red Oak Realtor Angelo Raymundo said two of his clients changed their plans to purchase property in the Bay Area; one is now considering moving to Europe. Others are holding off to see how the market will be affected.
However, for some, the election is prompting a decision to move to the Bay Area. Forest said she got a call from a friend who lives in Dallas, Texas, whose husband is from India. After the election exposed a rift in values with her neighbors, she and her husband are now considering moving to Berkeley to be around more “like-minded” people.
One of the more tangible results of the election on the housing market has been the spike in mortgage rates.
“Immediately following the election there’s been a significant increase in mortgage rates, almost a full one percent,” said Faramarz Moeen-Ziai, senior vice president of national retail sales at Commerce Bank. “The rates were hovering around 3.5% and are now up around 4.25%. And the reason for this is that as the stock market has hit record highs, the money entering the stock market is leaving the bond market, so rates go up.”
What does that mean for buyers in California, where the affordability index has been decreasing since the first quarter of 2013? Let’s say someone was going to buy a home for $800,000, with a 20% down payment. Before the election, a $640,000 loan would have translated to a monthly mortgage payment of about $2,900. Post-election, that amount shot up by an extra $250. In order to keep the mortgage payment at $2,900, the buyer would have had to reduce his or her loan amount to $580,000.
Granted, with median housing prices in the East Bay still incredibly high — $1.14 million in Berkeley and $720,000 in Oakland, as of the third quarter of 2016 — buyers here may be less impacted.
“If you’re buying a million-dollar house, there’s a good chance that you have some means and can withstand some market movements,” said Moeen-Ziai. “But if you’re buying a $500,000 house, that’s much more of a challenge.”
That doesn’t mean Bay Area buyers are immune. Vanessa Bergmark, the owner and president of Red Oak Realty, said some buyers are even seeing their locked-in mortgage rates fluctuate. In one case, a refinance loan rate increased by .05%, and in other, a buyer whose budget was $1.5 million and who had no contingencies saw a half-point loan rate increase.
Many variables can influence rates and who a bank is willing to risk lending money to. Funding sources can dry up, or the approval standards can change in a heightened risk-adverse market. From the time when an offer is written to the time when all parties accept it, the financial markets can change, increasing rates and putting a loan-contingency-free offer in a critical position. Bergmark says buyers should proceed with caution as this all shakes out.
“They have to be very cautious about removing banking contingencies because it’s anyone’s guess what tomorrow could bring,” she said. “Everyone expected the stock market to go down [after the election], but no-one expected the rates to shoot up that high.”
Without a loan contingency, a buyer is committing to an offer even if the terms of his or her loan change. Good-faith deposits reassure the seller that the buyer is serious, and can go toward the purchase of the home. But, if a spike in mortgage rates caused a buyer to have to back out of a deal, that would force the buyer to forfeit his or her deposit, a loss of potentially tens of thousands of dollars.
Where does that leave sellers? Bergmark said the uncertainty of a Trump presidency, coupled with the traditionally slow winter months, may cause them to postpone putting a house on the market. “They may want to wait out the reaction period and hold on until the summer,” she said.
The flip side of the rising mortgage rates, however, is that it could slow down the craziness of the Bay Area housing market.
“There’s always balance when something negative occurs,” said Bergmark. “The upside may be a softening market and a window of opportunity for buyers.
*Names have been changed to protect privacy.
Home Truths is written and sponsored by Red Oak Realty, one of the largest independent real estate brokers in the East Bay, serving the community since 1976. Read more in this series. If you are interested in learning more about the local real estate market, or are considering buying or selling a home, contact Red Oak at hello@redoakrealty.com, tel: 510-250 8780.
