Interest Rate Cuts Won’t Necessarily Help Bay Area’s Notorious Housing Market

Prospective homebuyers could soon see interest rates drop thanks to a cut to the Federal Reserve’s key benchmark, but some experts say tight supply and overwhelming demand are still likely to lead to a tough market for those in California.

On Friday, Fed Chairman Jerome Powell signaled that the central banking system would cut interest rates when it meets next in September, though he did not specify how much they will drop. Nationwide average interest rates for a 30-year fixed-rate mortgage have hovered around 6%–8% for the past year, slowing demand.

Although some real estate agents expect the rate decrease to be an encouraging sign of a busy fall season, others are hedging their bets on how much of an effect it will have on a tight California housing market.

Daryl Fairweather, chief economist at Redfin, has watched mortgage rates slowly go down since July. Despite the steady decline, she hasn’t seen more buyers returning to the market, potentially because they expect rates will drop even lower.

“The problem is that when you wait to buy until rates are lower, everybody is thinking the same thing, and then competition ends up being much fiercer,” Fairweather said. “By the end of next year, we could see prices high [enough] to the point that those gains in affordability are mostly canceled out.”

Another potential chilling effect on the market is that existing homeowners might be reluctant to move amid a contentious election season and mounting return-to-office requirements.

“People who have bought a home in the last two years with mortgage rates at 7% or higher, they’re all looking to refinance now rather than sell,” said Steven Huang, president of the San Francisco Association of Realtors. “That’s another reason why we think the housing supply is going to be tight.”

On the other hand, rate cuts could accelerate a trend in the East Bay, where cities like Dublin and Brentwood have seen significant population gains in recent years as more people take on a longer commute for a chance at homeownership.

Barbara Clemons, president of the Bay East Realtors Association, said high interest rates likely led many homeowners to hold off on buying a new home after initially buying when rates dipped in 2021 and 2022.

“Today’s sellers are tomorrow’s buyers, so those people who were maybe on the fence and are leery about the high interest rates and not moving — this is an opportunity now,” she said. “And also for buyers who were hoping interest rates would come down, this is an opportunity for them as well.”

Though it’s unclear how the expected Fed rate cut will play out in markets across the state, real estate agents all agree on one thing: If California’s housing inventory remains low, the balance between supply and demand will still be lopsided.

Construction firms continue to deal with the fallout from pandemic-era supply chain issues and high borrowing costs. According to a study from real estate research firm Point 2, permits for new homes in the Bay Area plunged last year, with the San Francisco-Berkeley-Oakland metro area seeing a 32.2% drop from the previous year — the sharpest decline in the region.

Jordan Levine, senior vice president of the California Association of Realtors, said that although the Fed’s rate cut might help, there’s a limit to how much it can do while the housing supply remains low.

“A lot of buyers are waiting for lower rates, and they may come in and butt up against our structural supply challenge,” he said. “We’re not building fast enough, causing prices to go up even faster.”