Central Valley, California housing market softened by Fed rate hike

After almost two years of booming home sales and values ​​boosted by the pandemic, the valley’s real estate market has started to weaken slightly – driven largely by fears of inflation and the recent rise in interest rates.

Last week, the US Federal Reserve raised interest rates by three-quarters of a point, the largest hike since 1994, to combat skyrocketing inflation. But even before the rate hike, Stanislaus County home prices fell 2% last month, from 10.4% year-to-date in May to 8.4% in June, according to data from TrendVision.

Daniel Del Real, a broker at PMZ Real Estate, said the Fed’s rate hike and associated mortgage rate hikes will continue to dampen demand in the region — but not necessarily willingly.

“Demand is still extremely high, but we’re seeing demand being crushed as rates increase,” he said. “This puts affordability out of reach. This will lead to a slowdown in the market and more pressure on the rental market.”

The Fed’s move comes at the start of what is typically the busiest season for the housing market. Del Real said he expects some decline in home prices as a result. But even if those fall, buyers in the region now need to anticipate how much of an impact higher mortgage rates will have on their final home price.

Rate hike offsets drop in selling prices

In many cases, he said, the rate hike will still cost them more over the long run than the initial fall in house prices they see. Del Real said mortgage rates started the year at about 4.7%, but since the Fed’s move, they’re now at 6% to 6.5%.

“Buyers will always pay more,” he said. “Buyers are already worried their money won’t go that far. It’s harder to save because gas prices have gone up, energy prices have gone up, food prices have gone up. And wages (follow) not as fast as inflation rises.”

Affordable housing problems in the valley, with more people wanting to buy homes than there are affordable homes available, continue despite rising inventories in the area, Del Real said. The TrendVision report shows that Stanislaus County’s inventory has increased 57% since 2021, but 5.7% fewer homes were sold and 5.1% fewer home sales were pending during the same period.

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New housing development at Founders Point by Florsheim and Fitzpatrick Homes on Carver Road in Modesto, California on Saturday, May 14, 2022. Andy Alfaro aalfaro@modbee.com

Del Real said the region’s current housing problems stemmed from a decade of under-development in the county. Several new housing developments are currently under construction, including approximately 550 single-family and multi-family homes that will be added at the new Founders Point, which has been under construction in north Modesto since last fall. Other projects, such as the long-brewed Tivoli housing development in northeast Modesto, are expected to add more than 3,100 homes to the master-planned community when complete.

Advice for sellers, buyers in changing markets

As new home construction continues to lag demand, Del Real says buyers and sellers should be prepared for the market to soften further as the year progresses.

“Brace yourself for more inventory, fewer products pending and sold, and a price drop in the third and fourth quarters of this year,” he said.

Del Real said it’s still a sellers’ market, but not everything will sell quickly and at top prices without work. He advises sellers to get their homes in great condition and to be realistic and creative about pricing and what people can afford given rising mortgage rates. Homes are also staying on the market longer, from about four to five days on the market last year to two weeks.

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New housing development at Founders Point by Florsheim and Fitzpatrick Homes on Carver Road in Modesto, California on Saturday, May 14, 2022. Andy Alfaro aalfaro@modbee.com

He advises current renters looking to buy to be patient and understand how mortgage rates will increase their overall costs. Del Real said he expects volatility in the market to continue for a few years. If current rates aren’t achievable, he advises saving some of the amount currently budgeted for a mortgage to be financially better off in the future.

“We had to tell customers to wait. I ask clients what would be a convenient (mortgage) payment for them right now,” he said. “And if it’s $2,700 (and her rent is $2,000), you’re saving that extra $700 a month on a property. Then they’ll be in a better position to enter the market in the next year or two. Start preparing today.”

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New homes being built by KB Homes as part of the Villages of Patterson development in Patterson, California on Tuesday April 12, 2022. Andy Alfaro aalfaro@modbee.com

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New housing development at Founders Point by Florsheim and Fitzpatrick Homes on Carver Road in Modesto, California on Saturday, May 14, 2022. Andy Alfaro aalfaro@modbee.com

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New homes being built by KB Homes as part of the Villages of Patterson development in Patterson, California on Tuesday April 12, 2022. Andy Alfaro aalfaro@modbee.com

This story was originally published June 23, 2022 6:30 am.

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Marijke Rowland writes about new business, restaurant and retail developments. She has been with The Modesto Bee since 1997 and covers a variety of subjects including arts and entertainment. Her Business Beat column runs several times a week. And it’s pronounced Mar-eye-ke.
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