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Rising rates may not normalize the housing market, but they may help inflation
Quick Take:

-Record high home prices aren’t going away, even with rising rates. However, the rising rate environment will prevent a significant amount of money from entering the economy.
-With nearly full employment, the Fed is hyper-focused on price stability — the other half of the Fed’s dual mandate — which means higher mortgage rates through the rest of the year.
-Demand is softening slightly now that the average mortgage rate jumped 2% in the past four months.

Note: You can find the charts & graphs for the Big Story at the end of the following section.

Prices continue to rise as mortgage rates hit 13-year highs

After the Fed’s May meeting, Fed Chair Jerome Powell announced that they are raising their benchmark rate by 0.50%, the largest hike since 2000. Earlier this year, the Fed was expected to raise interest rates by 0.25% at least six times this year, going from 0% to 1.90%. Now that each increase will most likely be 0.50%, the market expects the federal funds rate to reach 2.75% to 3.00% by the end of the year, which would be the highest in 15 years. Although the fed funds rate doesn’t directly affect mortgage rates, the rate hike moves into the broader economy quickly. Over the past four months, mortgage rates have moved about 2% higher for both 30- and 15-year fixed mortgages. Economists now estimate that 30-year mortgage rates could climb above 6% by mid-2022, which is fast approaching. Because the Fed indicated the path of rate hikes for the rest of the year, we expect mortgage rates to top out at around 7% this year for prime borrowers.


A rising rate environment increases short-term demand as buyers try to lock in lower mortgage rates, which is what we are seeing now. The increased short-term demand is driving prices right now outside of supply, which begs the question: Will higher mortgage rates actually drive down prices? No, they sure won’t.


Using history as our guide, we can see that home prices continued to rise even as mortgage rates peaked at over 18% in the 1970s, which would translate to about $7,500 per month on a $500,000 loan. Luckily, we aren’t going back to those rates. Higher rates, however, will do exactly what the Fed intends, which is to take money out of the economy and decrease overall demand. The average 30-year mortgage rate was 3.11% in December 2021, rising to 5.10% by the end of April 2022. If you bought a home in December and financed it with a $500,000 mortgage loan at 3.11%, your monthly spend on principal and interest would be $2,138 — versus $2,715 if you got the same loan in April 2022 at 5.10%. Over the life of the loan, you’ll spend $207,720 more at 5.10%. From the Fed’s perspective, that equates to roughly $500 less per month to spend on goods and services, bringing down aggregate demand when we multiply that reduction of disposable income across households. The gradual rate increases are meant to avoid sending the economy into a recession.


In addition to rising rates, supply still drives home prices. In April, the housing supply ticked up ever so slightly, but it’s still 60% lower than the number of homes on the market in April 2020. We are entering what is traditionally the hottest time of year for the housing market with a record low supply of homes. Over the past four months, which had the lowest inventory on record, home prices increased 12%.


If you are considering buying a home, there aren’t many reasons to wait. Home prices and rates are still rising. The low supply continues to make the market extremely competitive. We are starting to see some softening in demand, but not nearly enough to balance the supply side of the market.

Big Story Data
The Local Lowdown
Quick Take:

-Home prices in Silicon Valley remained historically high in April; short-term demand boomed as buyers tried to lock in lower mortgage rates.
-The second quarter of 2022 will indicate whether the market is moving toward or away from normalization. April data show the number of new listings declined, signaling potential supply issues in the spring and summer seasons.
-Despite some minor softening of demand as rates increase, low housing supply will continue to drive prices up unless an unexpected number of new listings come to market.

Note: You can find the charts/graphs for the Local Lowdown at the end of this section.

Home prices continue to rise despite rising rates

Single-family home and condo prices rose to all-time highs in April 2022 across much of the Silicon Valley region. It’s still too early, however, to determine how increasing rates will affect the market. Mortgage rate hikes only lower demand in the long term. In the short term, demand increases as buyers try to lock in lower rates. Over the past four months, the average 30-year mortgage rate has increased 2%, which means a 27% increase in monthly mortgage payments, yet prices keep moving higher.


The factors now affecting home prices are anticipated to have mixed results, unlike the past two years when all factors caused prices to increase. Rising interest rates, which will hopefully curb the rising 40-year-high inflation rate, will make homes less affordable and dampen demand over the rest of the year. They may, however, also lower supply as current homeowners reconsider their plans to sell.


Many homebuyers are also home sellers, moving from one home to another. Newer homebuyers and homeowners who refinanced over the past two years locked in one of the lowest rates in history, making moving a more difficult financial decision. This could keep supply unseasonably low with fewer new listings coming to market, as we saw in April. In general, the Fed doesn’t have a tool to deal with supply-side issues: It uses monetary policy to affect demand, making money more or less expensive. As a result, the Fed’s rate hikes may result in unintentional effects on supply. In Silicon Valley, the lack of housing supply will keep prices rising in the coming months.

New listings dip, seasonally abnormal

In Silicon Valley, inventory continued to climb higher in April, which is great news for the highly undersupplied market. However, new listings declined slightly from March to April for single-family homes and condos, far from the seasonal norm and an early indicator that home supply will remain depressed this year. The high demand and lack of new listings over the past year brought single-family home and condo supplies to record lows across markets. We were pleased to see that inventory increased over the first four months of the year, a trend that usually holds until mid-summer. The next three months will be telling of how inventory levels will trend for the rest of the year.


Even though inventory is low, sales remain incredibly high, especially when we account for available supply. This trend once again highlights the high demand in the area. Sellers can expect multiple offers, and buyers should come with competitive offers.

Months of Supply Inventory further indicates high demand relative to supply

Homes are selling faster than ever. Buyers must put in competitive offers, which, on average, are around 13% above list price for single-family homes and 7% above list for condos.


Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes listed on the market to sell at the current rate of sales. The average MSI is three months in California, which indicates a balanced market. An MSI lower than three indicates that there are more buyers than sellers on the market (meaning it’s a sellers’ market), while a higher MSI indicates there are more sellers than buyers (meaning it’s a buyers’ market). Currently, single-family home and condo MSIs are exceptionally low, indicating a strong sellers’ market.

Local Lowdown Data

The Big Story

Will rising rates normalize the housing market?

Quick Take:

Note: You can find the charts & graphs for the Big Story at the end of the following section.

Early innings for rising rates

Mortgage rates rose faster than expected in the first quarter of 2022, already surpassing forecasts for the year. The 30-year average mortgage rate rose swiftly in the two weeks after the Fed’s March meeting, up 0.5% between March 17 and 31 to 4.67%. This rapid increase has spurred purchases as buyers try to lock in lower rates before they climb higher. The data reflect the urgency buyers face. Nationally, home prices have reached yet another milestone: hitting above $200 per square foot, the highest level in history. But is the urgency justified? The answer is 100% yes, assuming you find the right home for you. Let’s dig into the numbers a little.


The average 30-year mortgage rate was 3.11% in December 2021, rising to 4.67% by the end of Q1 2022. If you bought a home in December and financed it with a $500,000 mortgage loan at 3.11%, your monthly spend on principal and interest would be $2,138 — versus $2,584 if you got the same loan in March 2022 at 4.67%. Over the life of the loan, you’ll spend $160,560 more at 4.67%. In short, every percentage point matters significantly. As an aside, refinancing has decreased 60% below last year’s levels, according to the Mortgage Brokers Association. Economists and real estate experts seem torn between rates peaking just below or just above 5%. Because the Fed indicated the path of rate hikes for the rest of the year, mortgage rates increased in anticipation and are likely to be affected less when the Fed moves the federal funds rate in the future, if it sticks to its schedule. At this point, we can almost guarantee that rates will not decline substantially this year.
As we look at historical trends in inflation, we are curious about how effective the Fed’s rate hikes will be. Rates rose significantly in the 1970s, partially due to the inflation rate at the time. Mortgage rates peaked at over 18%, which is unimaginable today. As we look at the long-term data, we see that inflation tends to decline when the federal funds rate is above the inflation level. Currently, the federal funds rate is far below inflation, and the Fed doesn’t plan to lift it near the inflation level because of the economic shock that would ensue. The current cost to borrow is actually negative, which may incentivize more people to borrow and spend more in the short term, driving inflation higher. At current mortgage and inflation levels, the borrower, not the lender, gains around 3% from borrowing.


In addition to rising rates, supply still drives home prices. In March, the housing supply ticked up ever so slightly from the all-time low in February. We are entering the spring buying season, however, with the lowest inventory on record. From March 2020 to March 2022, the housing supply declined 62%. Over the past three months, which had the lowest inventory on record, home prices increased nearly 10%. Rising rates, in the short term, boost demand because potential homebuyers want to get ahead of the increase, but in the long term, they reduce demand. Because the market is so undersupplied, less demand is actually a good thing. Home prices simply cannot maintain the rapid increases. Although a housing bubble isn’t likely yet, a sustainable growth rate is better and safer for the long term.

The Big Story Data

The Local Lowdown

Quick Take:

Note: You can find the charts/graphs for the Local Lowdown at the end of this section.

Home prices close the first quarter at record highs

Single-family home prices rose to all-time highs in Silicon Valley, while condo prices are just under their peak. Because sales often have a one-month lag, with homes going under contract around a month before the sale is complete, we cannot yet determine how significantly increasing rates have hit the market. Mortgage rate hikes really only lower demand in the long term, but in the short term, demand increases as buyers try to lock in a lower rate. The Silicon Valley housing market has a major advantage in that high demand is constant. Despite the huge increases in home prices over the past 12 months, the lack of housing supply will keep prices rising in the coming months.
The Fed is expected to raise interest rates by 0.25% at least six times this year, going from 0% to 1.90%. We are now entering a period where factors that affect prices are more mixed, unlike the past two years when all the factors caused prices to increase. Rising interest rates, which will hopefully curb the still-rising, 40-year-high inflation rate, will make homes less affordable and dampen demand over the course of the year. But inventory is so low that even with less demand, the market will likely remain undersupplied. It might seem counterintuitive that home prices can still appreciate after increasing so much over the past two years, but with inventory at record lows, home prices in 2022 will still increase — though at a slower rate than in 2021. With high sales relative to the available inventory, we anticipate a competitive market in the year ahead.

Home prices close the first quarter at record highs

Silicon Valley, like the rest of the country, has a historically low housing inventory. The sustained high demand and lack of new listings over the past year brought single-family home and condo supplies to record lows across markets. Although the first quarter of 2022 had the lowest inventory on record, we are pleased to see that inventory is increasing. If this upward trend continues into the second quarter, that will be a large indicator that the housing market is normalizing.

Sales have still been incredibly high, especially when accounting for available supply, again highlighting demand in the area. Sellers can expect multiple offers, and buyers should come with competitive offers. The incredibly high demand we’ve seen over the past year might wane as interest rates increase; however, the supply is so low that the market can handle a drop in demand without negatively affecting prices. The 30-year average fixed-rate mortgage hasn’t climbed above 5% yet, but it almost certainly will. If mortgage rates reach 5%, demand will likely decline more substantially. In the next few months, demand will remain high relative to available supply.

Months of Supply Inventory further indicates high demand and low supply

Homes are still selling extremely quickly. The Days on Market reflects the high demand for homes in Silicon Valley. Buyers must put in competitive offers, which, on average, are 14% above the list price for single-family homes and 8% above list for condos.

Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes for sale on the market to sell at the current rate of sales. The average MSI is three months in California, which indicates a balanced market. An MSI lower than that indicates that there are more buyers than sellers on the market (meaning it’s a sellers’ market), while a higher MSI indicates there are more sellers than buyers (meaning it’s a buyers’ market). Currently, single-family home and condo MSIs are exceptionally low, indicating a strong sellers’ market.

Local Lowdown Data

The ability to transfer your property tax basis to any county in the State of CA opened up March 2021, but sellers are still figuring how it will benefit them.

Popular Sunnyvale Ranch House

California Assoc of Realtors put together a great website to provide more information for sellers to calculate how your property tax bill will change. The benefits of Prop 19 over the previous Prop 60/90 is that EVERY county in the state must accept the transfer of the tax basis. Previously, there were as few as 13 counties cooperating. https://www.prop19taxbreak.com/

Please reach out to Linda Baker for a personal, comprehensive review of your property value, or if you have further questions about transferring your property tax basis.

Linda Baker of Milestone Realty has been helping San Jose home buyers and sellers since 2003. Call Linda directly at 408-539-6691 to learn how the Milestone team can help you! [email protected]

The Big Story: Record highs and lows in the housing market

Quick Take:

Note: You can find the charts & graphs for the Big Story at the end of the following section.

Amplified Seasonal Trends

Seasonality in the housing market was incredibly steady before the pandemic. Prices typically rose from January to June, when inventory was low but rising, and then flattened from July to December, when inventory was high but declining. In January 2020, homes were already undersupplied, hitting a record low with just over a million homes for sale on the market. When the pandemic hit, demand for homes exploded, dropping inventory to shockingly low levels. During the 18 months between January 2020 and June 2021, inventory declined 49% and prices increased 32%, doubling the total price increase of the previous three years combined. By January 2022, inventory had reached an all-time low, down 60% in the past two years, while home prices reached a record high, up 34%.
Home sales have only gotten quicker as the market has become more efficient. We can see this trend through the Days on Market and Months of Supply Inventory (MSI). Before the pandemic, homes were already selling more quickly, primarily because of technology and an increasingly competitive market. A more efficient market matches the right people with the right home at a fast pace, causing a drop in supply when new homes aren’t being built. MSI, which quantifies the supply-and-demand relationship, is at a record low, further indicating a sellers’ market. The low supply, high prices, and speed of purchases have shifted homebuyer makeup.


The number of first-time buyers dropped 6% over the past year, while sales to investors rose 7%. All-cash offers increased significantly, often disproportionately affecting first-time buyers, who are most likely to need financing. With rising mortgage rates, many first-time buyers will once again be hit hardest with higher monthly payments. Rates have already risen, because the Fed is expected to start increasing rates in mid-March, and they will only climb higher. Because of the rising cost, the average age of homebuyers is climbing. The average first-time buyer is now 33 years old, and the average repeat buyer is 56 years old, an all-time high. As we enter a new chapter in the housing market, one characterized by rising rates and very low supply, demand can only go one direction: down. But for now, prices aren’t in danger of declining.


Over the next several months, we expect supply to matter more than the interest rate hikes when it comes to home prices. Economists anticipate that the Fed will start the first of six incremental 0.25% increases in March. The Fed uses interest rates in particular as a tool to meet its dual mandate of maximum employment and price stability. With inflation at a near-40-year high, prices for most goods are rising while incomes are not. This situation gives the Fed little choice but to raise interest rates. Essentially, when the cost to borrow increases, fewer people want to borrow, leading to less consumer spending (less demand), which lowers prices.


As we enter this new chapter of rising mortgage rates, we don’t expect home prices to decline significantly, if at all, because supply is still such a driving factor. The low supply means that demand can decline without negatively impacting prices. We don’t expect home prices to appreciate at the record level we experienced over the past two years, but we do expect to see an increase. We are still in the middle of one of the strongest sellers’ markets in history. Buyers must come in with fast, competitive offers in this environment.

Big Story Data

The Local Lowdown

Quick Take:

Note: You can find the charts/graphs for the Local Lowdown at the end of this section.

Single-family home prices rose to all-time highs in Santa Clara and Santa Cruz, while San Mateo prices are just under their peak. Santa Clara condo prices also reached an all-time high in February 2022. Mortgage rate hikes really only lower demand in the long-term, but in the short-term, demand increases as buyers try to lock in a lower rate. The Silicon Valley housing market has a major advantage in that people simply want to live there. Silicon Valley tends to attract highly educated, affluent individuals. This tends to have a snowball effect, making these areas more and more desirable places to live. Despite the huge increases in home prices over the past 12 months, the lack of housing supply will keep prices rising in the year to come.


The Fed is expected to raise interest rates by 0.25% six times this year, going from 0% to 1.50%. We are now entering a period where factors that affect prices are more mixed, unlike the past two years when all the factors caused prices to increase. Rising interest rates, which will hopefully curb the still-rising inflation, will make homes less affordable and dampen demand over the course of the year. But inventory is so low that even with less demand, the market will likely be undersupplied. It might seem counterintuitive that home prices can still appreciate after increasing so much over the past two years, but with inventory at record lows, home prices in 2022 will still increase — though at a slower rate than in 2021. With high sales relative to the available inventory, we anticipate a competitive market in the year ahead.

Record-Low Inventory Persists

Silicon Valley, like the rest of the country, has a historically low housing inventory. The sustained high demand and lack of new listings over the past year brought single-family home and condo supplies to record lows across markets. We are seeing that far more people want to live in Silicon Valley than want to leave. Sales have been incredibly high, especially when accounting for available supply, again highlighting demand in the area. Sellers can expect multiple offers, and buyers should come with competitive offers. The incredibly high demand we’ve seen over the past year might wane as interest rates increase; however, the supply is so low that the market can handle a drop in demand without negatively affecting prices. The 30-year average fixed rate mortgage hasn’t climbed above 4% yet, but it almost certainly will as the Fed starts raising rates. If mortgage rates reach 5%, demand will likely decline more substantially. In the next few months, demand will remain high relative to available supply.

Months of Supply Inventory further Indicates High Demand and Low Supply

Homes are still selling extremely quickly, indicating the high demand in Silicon Valley. Buyers must put in competitive offers, which, on average, are 5–10% above list price.


Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes for sale on the market to sell at the current rate of sales. The average MSI is three months in California, which indicates a balanced market. An MSI lower than that indicates that there are more buyers than sellers on the market (meaning it’s a sellers’ market), while a higher MSI indicates there are more sellers than buyers (meaning it’s a buyers’ market). Currently, single-family home and condo MSIs are exceptionally low, indicating a strong sellers’ market.

Local Lowdown Data

Buyers are scrambling all over the market trying to find houses to buy. Inventory remains low which means that demand remains sky-high. Take a look in this months’ Market Update to see what is causing this market rush and why houses are flying off the shelves. With an in-depth look at the numbers from year-to-year, as well as what the market looks like after two years of the pandemic, Linda will help you stay informed and ready to make the best decision for you and your home!

The real estate world is scratching their heads about why the market is staying so hot so deep into the winter season. Even the experts are being thrown for a loop trying to figure out what the heck is going on.

But fret not, because Linda has the answers! Tune in and find out why a listing is hitting sky-high numbers right now!

This has been a Milestone end to the year. The real estate market has been setting records with on both demand and pricing. Let’s take an in-depth look at what happening in this month’s Market Update!

If this sounds like the kind of opportunity you have been looking for, contact us today. Let’s take advantage of these conditions and get you the sales price you have always wanted!

One of the advantages of having years of experience as a realtor is that you get a solid knowledge base of the market and can put those skills to use at a moment’s notice! I was happy to be interviewed for a news segment for ABC7 and was happy to help provide some insight on the impact of Prop 19. I love being able to help provide knowledge about real estate because let’s be honest, it isn’t easy stuff!

Click here to check it out!

Normally we see a cooldown during the winter months, but this year has been quite different. This has been by far the hottest sales market we have ever seen for a December timeframe. With many sales factors continuing to move in an upward trend, it is hard to believe that we are quickly approaching the winter. Join Linda with this month’s Market Update as she examines what is going and what it might mean for you.

Click here to watch!

https://www.youtube.com/watch?v=E_uqBCeSmLU

With HGTV, it seems like everyone wants to remodel, rebuild, flex those creative muscles. Here is your chance to own a large lot, with a great location, adjacent to Palm Haven, just a block to Lincoln Ave, & close to the future Google campus. 997 Ramona Ct is only 848sf but on a spacious 7,050sf lot!

Fix it up, or tear it down for a clean slate. The choice is yours! Listed at $898,000, you will be able to do whatever you want and enjoy the Willow Glen lifestyle!

http://sites.listvt.com/997ramonact

Linda Baker of Milestone Realty has been helping San Jose home buyers and sellers since 2003. Call Linda directly at (408) 539-6691 to learn how the Milestone team can help you!

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