The Spring real estate market sales activity continued with an upward trajectory for all of our local markets. However, in June we saw the beginning of the end for all-time low interest rates. Announcements by the Fed of a strengthening economy and the reduction of its bond buyback program triggered an uptick in the Treasury yields, which pushed interest rates off of their all-time lows. During the last 2 weeks of the June, the 30-year fixed interest rate bounced between 4.5% to 5% in comparison to sub-4% rates during most of the first half of the year.

As expected, the Palo Alto market continues to clear most of its inventory within 7-10 days on the market especially in the sub $3 million price point. Menlo Park and Los Altos also continue to witness high demand for the sub-$3 million properties. However, both cities are starting to feel a slight slowdown in the luxury market. Homes priced north of $3 million may now offer an opportunity for price negotiation, especially with more than 60 days on the market.

The common denominator across all of the mid-Peninsula cities, from Mountain View to San Carlos, is the high demand of first time homebuyers looking to purchase properties between $900,000 – $1.5 million. These buyers are often dual-income with young children (or have kids on the mind). They are looking to move down from San Francisco or out of a rental property.  We are witnessing a “glass is full” phenomena: these buyers are priced out of Palo Alto and Menlo Park, since these cities rarely offer properties in this price range anymore. They are now happily expanding their home search to include the surrounding cities of Mountain View, San Carlos and Redwood City, where properties are more affordable but still offer close proximity to lively downtowns and easy access to their places of employment.

What remains to be seen is what effect, if any, the rise in interest rates will have on buyer demand.  Since the majority of these first time home buyers need mortgage financing to purchase a home, it is this group that is most sensitive to interest rate fluctuation.  Over the past few months, we have received feedback from buyers that they have become accustomed to homes selling for $100K-$200K over the asking price. This has discouraged them from pursuing houses. If there are fewer buyers chasing houses due to the interest rate hike, buyers may have a renewed opportunity to pursue houses that they previously had felt were out of reach.