The San Francisco Real Estate Blog

MARKET TILTING TOWARD NORMAL / Those heady days of traffic jams outside open houses are gone. Inventory is increasing, and buyers have a better chance

Nielsen, who originally listed the 1,700 square-foot Novato townhouse for $799,000 before lowering it to $749,000, thinks rising interest rates and a sense of price fatigue are finally starting to take some starch out of the market. This week, the average rate for a 30-year fixed mortgage hit 6.03 percent -- the first time it has been above 6 percent since March, according to mortgage titan Freddie Mac.

"Appreciation has been in the double digits for so long that at some point it just outstrips the ability for the vast majority of people to afford these homes," Nielsen said, noting that if the buyers of the Novato condo don't want his "neo-classic" Jaguar XJ6, they will get a credit for $2,500. "Earning power isn't keeping up, and it takes some time to correct."

"Price fatigue." "Affordability." These excuses are, quite frankly, self-deceptive hooey. Prices in the SF Bay area have been on a screaming rise for ten years, and the affordability index has ranged from the low to the high teens for the entire run. Only one thing has made the SF bubble possible: historically low real interest rates. That is ending, and with it will end the era of one point arms, creative financing, and all the other gimmicks that have served to put tens of thousands of people into homes and financing packages they won't be able to afford in the new interest rate climate.

Take a look at this long-term chart:

National Average Contract Mortgage Rate, 1963 - 2005

Eyeballing this, the formation looks like it might allow for one more shot at a "lower-low" bottom, but I wouldn't bet the, um, house on it.

Now take a look at thirty years worth of fixed versus ARMs.

30-Year FRM Rates 1971 - 2005

The ARMs have already bottomed and started up. This is not good news for the mortgage fuel that has powered the last gasp of the bubble. And, of course, as people bail out of ARMs and start to chase fixed rates, you'll see those rates go up as well. When the two lines finally intersect, it will be time to take a hard look at your financing arrangements, because that point will mark the switchover from a virtuous to a vicious cycle in the real estate markets.