The home, which hit the market in April, lasted a mere 10 days before a sale was pending. Listing agent Kevin Tannahill told KPIX the home received 11 offers, all at least $200,000 over asking. The owners accepted the offer that was $1.155 million over asking, putting the final sale at $2.45 million.
“It was a mid-century modern. The mid-century modern has a following around the Bay Area,” Tannahill told KPIX. “It was a unique home, which is what drove the price up.”
Property records show the home last sold for $818,000 in December 2013.
The big overbid puts the house well over the typical home value for El Cerrito. According to Zillow, the average home price for the East Bay city is $1,143,096, an increase of 7% year over year.
The widening gap is a stark example of the squeeze that high housing prices and rising mortgage rates are putting on average home buyers, especially those entering the market.
“The conforming-loan buyers are usually first-time home buyers and they are really stretching to get into the market,” said Jim Wahlberg, a Compass agent in Danville. The rate hike “is often pricing them out of the market, because of the monthly cost.”
At the end of last year, the average rates on 30-year fixed-rate conforming and jumbo loans were about even — 3.33% and 3.31%, respectively. By the week ending May 6, the averages had jumped to 5.53% for conforming but only 5.08% for jumbos, according to the Mortgage Bankers Association.
On a $600,000 conforming loan, the difference between 3.33% and 5.53% adds $780 to a monthly mortgage payment. On a $1 million jumbo, the difference between 3.31% and 5.08% adds $1,032.
The recent surge in mortgage rates is making it even harder for home buyers, especially for those needing conforming loans, which have shot up faster than rates on larger “jumbo” loans.
Yalonda M. James/The Chronicle 2021
Conforming loans must meet the federal underwriting guidelines of Fannie Mae and Freddie Mac. The standard dollar limit for a one-unit home this year is $647,200 in most parts of the country, but it can be up to 50% higher in high-cost areas. It’s at the max — $970,800 — in all Bay Area counties except Sonoma (where it’s $764,750), Napa ($897,000) and Solano ($647,200).
Jumbo loans are those that exceed Fannie/Freddie limits. Each lender sets its own rules for jumbos, but they typically require borrowers to have larger down payments and stronger financial profiles than needed for conforming loans. About 17% of all purchase and refinance mortgage rate locks in April were for non-conforming loans, mostly jumbos, according to Black Knight.
Colin Booth and his wife started looking for a home in Contra Costa County in September, when they were quoted rates under 3%. With two young boys, they started out targeting four-bedroom homes under $975,000 in Martinez and Pleasant Hill. After getting outbid multiple times, they offered as much as $1.2 million on one home. As home prices and interest rates marched upward, they revised their search to three-bedroom homes, then to neighboring Solano County.
They lucked into a four-bedroom home in Benicia where the owner was willing to sell for $875,000 after a previous deal fell through. They borrowed $743,750, which is higher than the maximum conforming-loan amount in Solano County, but they were able to lock in a jumbo rate of 4.625% in mid-April. Their mortgage broker “was saying jumbo was more advantageous even though it typically doesn’t work that way,” Booth said. They closed on Friday.
The spurt in mortgage rates is causing some buyers to look for cheaper houses or neighborhoods, switch from fixed- to adjustable-rate mortgages or move to the sidelines, according to local real estate and mortgage professionals. “Two clients this past week put the brakes on,” said Dawn Thomas, a Compass agent in Los Gatos.
A subset of conforming loans, that fall between the standard and high-cost limit for a county, are called high-balance conforming loans. They’re fairly common in the Bay Area, where the median price was $1.2 million for a single-family home and $775,000 for a condo in March.
High-balance conforming loans are still guaranteed by Fannie or Freddie and must meet their rules. Normally, their rates are higher than standard conforming loans (up to $647,200) but lower than jumbos. Today they’re higher than both, in some cases by nearly 1 percentage point.
One reason they’re higher: Earlier this year, Fannie and Freddie began imposing new fees on second-home mortgages and most high-balance conforming loans. The fees vary, but for most borrowers with loan-to-value ratios of 80% and above, they “would be roughly equivalent” to adding 0.25% to the loan rate, said Keith Gumbinger, a vice president with mortgage tracker HSH.com.
On Thursday, four Bay Area mortgage brokers quoted rates ranging from 5.125% to 5.375% for a standard conforming loan, 5.5% to 5.875% for a high-balance conforming loan and 4.75% to 5% for a jumbo loan. (These were their best rates for loans with 20% down and no points, a type of loan-origination fee. Rates change frequently and vary depending on home type, use and location, points, down payment and borrower profile.)
Some Bay Area borrowers needing a loan in the high six figures could save a little money by getting a jumbo instead of a high-balance conforming loan, but only if they can meet the stiffer jumbo requirements.
These rules vary, but the best jumbo loans generally demand at least 20% down, six to 12 months’ worth of monthly payments in reserves (cash or investments), a credit score of at least 680 to 700 and a total-debt-to-income ratio no higher than 43% or 45%.
By comparison, Fannie and Freddie will back loans with as little as 3% or 5% down for a primary residence, a 620 minimum credit score and a debt-to-income ratio up to almost 50%. They generally don’t require reserves.
After getting outbid on eight homes, Conery and Traci Wilbanks finally were able to buy a home in Oakland’s Maxwell Park neighborhood for $905,000 in April. They put down 20% and borrowed $724,000. Instead of getting a high-balance conforming loan, their mortgage broker — Zach Griffin of Guaranteed Rate Affinity in Berkeley — qualified them for a jumbo loan. They locked in a rate of 4% in March; at that time a high-balance conforming rate would have been about 4.75%, Griffin said.
Jay Voorhees, owner of JVMlending.com in Walnut Creek, said only about half of his Bay Area clients borrowing between $647,200 to $970,800 could qualify for a jumbo mortgage. “About half can’t, because they don’t have the cash for the reserves or the down payment or their debt ratio is too high.” His purchase-loan volume is 15% to 20% below last year.
“There are a lot of first-time buyers freaked out,” said Brett Nicoletti, a branch manager with Academy Mortgage in Los Gatos. “I have a lot of Fannie Mae buyers who won’t fit into a jumbo slot. If they were looking at homes for $800,000, now they’re looking at $700,000. Wherever they were pushing their limits, now they are lowering their expectations.”
So why are jumbos cheaper than conforming mortgages? Their rates march to two different drummers.
Many banks plan to hold jumbos in their portfolios, and use their own cash to fund them. “This cash comes mostly from (customer) deposits, where rates are still very low, although reportedly creeping up a little,” Gumbinger said.
Conforming loans are usually packaged into mortgage-backed securities and sold to investors. Their pricing is based on what’s happening in the bond market, especially the 10-year Treasury yield, which has spiked from 1.5% on Dec. 31 to around 3% in early May. “This has kicked conforming mortgage rates higher very quickly,” Gumbinger said.
The Federal Reserve has also played a role, said Andy Walden, a vice president with Black Knight Data Analytics.
“During the early stages of the pandemic, banks were hesitant to lend due to uncertainty in the mortgage market and broader economy. This resulted in a pullback in jumbo lending” and higher rates for jumbo loans, Walden said via email. Meanwhile, the Fed brought down long-term interest rates by purchasing Treasury bonds and securities backed by conforming loans. “This drove down conforming loan interest rates and made them much more attractive” than jumbos.
“In recent months, the opposite has occurred,” he added. To fight soaring inflation, the Fed announced on May 4 that it will begin reducing its holdings of Treasury and mortgage-backed securities in June. “This has resulted in a sharp rise in 30-year conforming interest rates, as the largest buyer of conforming mortgage-backed securities exits the market. At the same time, banks have returned to jumbo lending. The combination of these factors” has made jumbo rates more attractive than conforming ones.
“Until the Fed’s plan is implemented and investors and markets see how that exit will unfold, I think we will see this extra upward pressure on conforming rates,” said Joel Kan, an economist with the Mortgage Bankers Association.
The mortgage rate increase “is certainly affecting affordability,” said Westin Miller, branch manager with Pinnacle Home Mortgage in Novato. But “I’m getting less pushback than I had expected. Maybe one-fourth of my pipeline of shoppers have dropped out. The other three-fourths are still in it. The group who are least deterred are older buyers; they all say look, I bought my first house when rates were 13%, so 5% is not a big deal.”
Bay Area real estate agents say the combination of exorbitant prices and rising interest rates has already weakened demand for housing.
“There is a little bit of softening in the market. A lot of buyers’ purchasing power has dropped dramatically. While we were seeing 10 offers six or seven weeks ago, every home I listed in the last month only got two offers each,” said Jason Moon, a Keller Williams agent in Walnut Creek.
“A lot of our buyers at the million-dollar range are paying all cash,” said Nina Havatny, a Compass agent in San Francisco. The interest rate bump “is not impacting them. But we are certainly seeing it in the $2.5 million to $4 million range. It’s really quite dramatic. We have one buyer who was trying to find a house in the Inner Sunset. She has given up, and is now going to renovate her (current) house.”
Patrick Carlisle, Compass’ chief market analyst, looked at year-over-year changes in the number of price reductions for the multicounty San Francisco metro area, through April 23. While the recent data is preliminary, “it looks like a consistent trend is beginning to develop, indicating that year over year, the number of price reductions is increasing — admittedly from a very low base last year — and the market has begun cooling from the extremely heated conditions which have existed,” he said via email.
Realtor D.J. Grubb, owner of the Grubb Co. in Oakland, doesn’t think interest rates will really impact home prices until they hit 7%. A bigger issue is “access to capital.” If the stock market keeps falling, many people will be unwilling to sell stocks to buy homes.
Where interest rates go is anyone’s guess. But it’s hard to see the Fed backing off its inflation-fighting efforts until prices, including home prices, cool off or there’s a stock market crash. That said, the Bay Area housing shortage has been so acute that it’s hard to see home prices tumbling unless the Fed goes too far and triggers a severe recession. If that happens, interest rates will come down, homes could become more affordable and people who took out a mortgage today could refinance at a lower rate.
Kathleen Pender is a freelance writer and former columnist for The San Francisco Chronicle. Twitter: @KathPender
The futility and hypocrisy simply became too much, he said in a series of phone interviews from his new home on the East Coast.
“It’s a beautiful city,” he said about San Francisco. “But it’s fraudulent. We are a fraudulent city.”
That’s a big charge for a little city, but he has a point. San Francisco and the wider Bay Area pride themselves on being progressive, welcoming, equitable and compassionate, but fail to live up to those ideals.
Lerner is the first to admit his family has it better than many, but they still couldn’t make the Bay Area work.
Lerner for three years led At the Crossroads, a small nonprofit that seeks to help homeless youth build successful lives. His husband, a Black man, spent his career as a paramedic before becoming a real estate agent for more money and less stress. They adopted a biracial son, now 13, out of foster care.
They should be the sort of family San Francisco and the wider Bay Area would like to keep and help thrive, but they didn’t feel that way.
“Everything was a battle,” Lerner said.
When they outgrew their tiny Oakland home, they started house-hunting and found they could maybe — even with Lerner’s $135,000 salary — buy a house in Concord, nowhere near his job in San Francisco.
They couldn’t find a consistent therapist or solid educational support for their son, who has special needs. They wondered why their high property taxes paid for “systems so woeful,” Lerner said. And when they spent time in San Francisco, Lerner’s husband asked where all the Black people were.
“Being progressive means progress, reform, seeking greater economic and social justice,” Lerner said. “Our city has been the antithesis to this in many ways. Leaders ultimately have to take responsibility for this reality.”
Lerner said he joined Mayor London Breed on a Zoom call for homeless service providers early in the pandemic and voiced his concerns about underpaid nonprofit workers. Lerner said he asked the mayor to describe her vision for addressing the city’s lack of affordability.
“Her response was basically that we are a city with very limited land, and at the end of the day, it’s just going to be an expensive city,” he said.
Jeff Cretan, a spokesperson for Breed, said she has consistently pushed for more housing to bring prices down, but has often been stymied by the Board of Supervisors. She’s now backing a charter amendment intended for the November ballot that would streamline and hasten the building of 100% affordable housing complexes, teacher housing and projects that include 15% more below-market rate units than currently required. The majority of supervisors repeatedly opposed Breed’s attempt to get the same policies passed through legislation.
The current pace of housing production of all types is pathetic. This week, six years after a developer agreed to donate 180 Jones St. to the city as part of a bigger housing deal, the Board of Supervisors approved building 70 affordable units there. While construction should start soon, it will probably be at least eight years from the original deal being struck to tenants moving in.
Meanwhile, the city’s cost of living soars, and the frontline workers charged with solving San Francisco’s biggest crises — homelessness, drug addiction and untreated mental illness — are vastly underpaid.
One of San Francisco’s most glaring inequities, as Lerner pointed out, is that City Hall gives its employees healthy salaries and generous benefits and pensions while contracting with nonprofits to do the on-the-ground work for much less. Lerner gave his private donors the hard sell and was able to raise his employees’ salaries somewhat, but other nonprofits that rely more on city funding can’t do that.
I wrote in 2018 about Homeless Outreach Team workers making so little, they live paycheck to paycheck themselves and quickly burn out. Back then, the entry level hourly rate was $23.19. Four years later, the city has raised that pay by a whopping $1.29. More experienced outreach workers, to the city’s credit, can earn up to $33.72 per hour. There should be 77 outreach workers, but there are currently 11 vacancies.
Emily Cohen, a spokesperson for the city’s Department of Homelessness and Supportive Housing, said the department is undergoing “a great deal of equity analysis” about pay in the nonprofit sector.
Vitka Eisen, president and CEO of HealthRight 360, which provides care to homeless people and those addicted to drugs, said the pandemic-fueled labor shortage coupled with the city’s low pay have made hiring harder than ever. Her organization has a 35% vacancy rate in San Francisco, meaning treatment beds go empty because there’s nobody to staff them. She said someone with the same qualifications in mental health or drug treatment can find a city job for 45% more pay. In fact, the city just hired more than 200 behavioral health workers after cutting through red tape, which shows it can staff some of these jobs.
Joe Wilson, executive director of Hospitality House, which provides shelter and services to homeless people, said his staffers earn around $45,000 to $55,000 a year and commute from as far as Stockton and Vacaville. He agreed adamantly with Lerner’s assessment of San Francisco failing to live up to its progressive ideals.
“The reputation doesn’t align with the reality,” he said.
A new controller’s report showed that San Francisco spends $1.2 billion on 600 nonprofit service providers annually to work on homelessness, drug treatment and mental health — but the low wages mean high turnover and a lack of consistency for clients. Many of the most challenging positions pay less than $20 an hour, the report found.
Lerner said the city is telling its nonprofit workers “they don’t deserve to own their own homes, they don’t deserve to live in the city, and they don’t deserve to take a nice vacation once a year.”
It would seem that an audit of the nonprofits could find ways to streamline their efforts and pay their workers more, but a long-promised audit from Breed still isn’t done.
The whole picture is enough to make many people throw up their hands in frustration and leave San Francisco and its mind-boggling hypocrisy behind them. But Lerner, for one, hopes to come back when his son has completed high school.
“Maybe San Francisco can return to some semblance of itself over the next few years,” he said. “It’s home.”
Heather Knight is a San Francisco Chronicle columnist. Email: hknight@sfchronicle.com Twitter: @hknightsf
But developers have said there are numerous hurdles to converting offices to housing, including high construction costs and lack of access to light and air within structures. The city’s Planning Department database shows no major office to housing conversions have been proposed during the pandemic.
A few high-profile conversions were completed prior to the pandemic, including the 418-unit 100 Van Ness Ave., the former California State Automobile Association headquarters and the ultraluxury Pacific condo project, which had more than $300 million in sales. The former Chronicle offices at 690 Market St. are now the Ritz-Carlton Club and Residences.
San Francisco office vacancy rose to a record high 23.8% in the first quarter, or 20.4 million square feet vacant, according to real estate brokerage firm CBRE. But 8.4 million square feet was listed as sublease space, meaning landlords are still collecting rent from the original tenant. Average asking rents were $76.27 per square foot annually, higher than the rents on a typical apartment.
Some developers are moving forward with converting aging malls sites into large housing projects, but plans typically involve demolishing the existing buildings or creating new homes on top of parking lots. Such projects are vast undertakings and can require billions of dollars of spending. Brookfield has proposed nearly 3,000 housing units at the Stonestown Galleria, for example, while the former Vallco mall in Cupertino is being developed into 2,400 homes and almost 2 millions square feet of office space.
Newsom’s budget proposal calls for a total of $37 billion for housing investment and new infrastructure such as broadband internet.
Roland Li is a San Francisco Chronicle staff writer. Email: roland.li@sfchronicle.com Twitter: @rolandlisf
San Francisco’s commercial real estate vacancy hits 24% as companies such as Splunk downsize
Data analytics company Splunk is not moving its headquarters, but it is downsizing its office space in downtown San Francisco. The move is part of a larger trend as commercial real estate vacancies have increased and become a big challenge for the city as companies adjust to more work-from-home hybrid models.
SAN FRANCISCO – It was 2016, when Splunk moved its San Francisco headquarters into the shiny, new South of Market building at 270 Brannan Street. Now, the data analytics company has decided to downsize, giving up its lease at the 215,000-square-foot space.
“San Francisco remains Splunk’s headquarters. We are consolidating our operations to a newly renovated office space at 250 Brannan, where Splunk began,” said a Splunk spokeswoman in a statement to KTVU.
That building at 250 Brannan where Splunk first started operations is less than half the size of the current headquarters space next door.
“We’re close to 24% vacancy for office space in the city,” said Matt Regan, Vice-President of the Bay Area Council. Regan says that is a new high for San Francisco, “We didn’t see numbers that high after the financial collapse or after the dot-com bust, so these are pretty unchartered, unprecedented times.”
Throughout downtown San Francisco, the impact of work-from-home pandemic policies is evident in the number of for lease and rent signs in the windows.
“Things are not at 100% capacity. We’re on a hybrid schedule and things are definitely not what they were pre-pandemic,” said Sridhar Akkapeddi, a San Francisco resident who works downtown, “I think that this notion of needing to be in a certain place to do certain types of work is going to change.”
“My office started three days a week as a requirement to get in the office and be there,” said Shivali Naik of San Francisco, “I’d say not every company has opened up yet, but things are opening up slowly.”
Along with commercial office space, there are also vacancies where retailers and small businesses that depended on foot traffic from office workers have felt the pain.
The Sutter Station Tavern one of the businesses that has survived, a fixture on Market Street for 25 years. Happy hour crowds, though, are far lower than pre-pandemic levels.
“Right now it’s like 30%,” said the owner Barbara Alessi. She says she’s happy to see people returning and hopes for more, “I’m hoping the businesses come back. I think the real estate in SF is so high and hopefully goes a little lower, there’s so much vacancy right now.”
The Bay Area Council says office rents have come down recently from pre-pandemic levels of about $90 per square foot.
“It’s now down to about $76 a foot, which is still relatively high both historically and compared to peer markets,” said Regan.
“There’s definitely still some optimism in the commercial real estate world that things will return to normal, so there aren’t as many bargains out there to be had as one would expect given the size of the vacancy rate,” said Regan.
“Abandoning downtown areas is not a trend that we are seeing, it’s more of a pause as companies assess their needs. Most companies strongly believe in the role office workplaces provide for collaboration, innovation and company culture,” said Colin Yasukochi, Executive Director of the real estate firm CBRE’s Tech Insights.
“San Francisco still has a long way to go to fill its 20 million sq. ft. of currently vacant office space. CBRE estimates that at least 100,000 new workers are needed to accomplish this,” said Yasukochi.
The Bay Area Council says while some jobs might remain remote, there are signs from the organization’s surveys that tech workers who tend to be younger might be inclined to return to offices in the future.
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“Younger workers do tend to want to come back to the office as well, because mentorship opportunities are not really possible when you’re working remotely. The camaraderie, the social aspect of working in an office with teammates and colleagues is something younger workers seem to miss a lot more,” said Regan.
