Here’s how much Bay Area home prices would have to fall to offset rising mortgage rates

That’s up two points from five months ago, and twice the rate since early January.

As a result, mortgage payments are significantly higher compared with May for the 10 largest U.S. cities by population, as well as San Jose and San Francisco, according to a Chronicle analysis of Zillow’s typical home values. The analysis used a
mortgage calculator, assuming a 30-year fixed loan and 20% down payment.

Patrick Carlisle, Bay Area chief market analyst for real estate brokerage Compass, said the payments illustrate the “huge impact the increase in rates has had on housing affordability,” especially considering that in early January, the mortgage rate was at just 3.2%.

So how low would home values need to drop for a buyer to get similar monthly payments to five months ago? In San Francisco, home values dropped 6.2% from May to September. They would have to drop an additional 10.4% — from $1.49 million to $1.33 million — to get a monthly payment close to May’s $8,000 level.

In San Jose, the typical home value would need to drop 10% to $1,224,000 to get a monthly payment similar to the approximately $7,350 paid in May.

Still, Bay Area home values would have to decline less than in the 10 most populated U.S. cities to return to the May payment level at today’s higher interest rate. That’s because the region’s already sky-high housing prices had a lower growth ceiling than other markets, experts said.

“Affordability was already challenging in the Bay Area before the pandemic-fueled boom, so there wasn’t as much room for prices to rise before buyers started crying uncle,” said Zillow data spokesperson Matt Kreamer.

“So while homes are incredibly expensive, prices didn’t rise as much as they did elsewhere, meaning they don’t have to drop as far to help defray some of the costs of rising mortgage rates.”

Houston’s home values would need to drop 18.2% — the most of the 10 largest U.S. cities — from about $273,000 to $223,000 in order to return to May’s monthly payment of nearly $1,400. New York City’s home values also would need to fall substantially — 17.4% — from $782,000 to $646,000.

Carlisle said he can’t predict what will happen with home prices, as many volatile factors — economic, political and demographic — are currently at play.

“We are still clearly in a place of adjustment in the economy and in the housing market, and things have not yet stabilized,” he said. “In the past 40 years, significant market corrections have typically seen price declines in the 5 to 10% range, which isn’t that much considering the high appreciation rates we’ve seen in recent years.”

He added that those market corrections do not include the 2007 subprime mortgage crisis, which resulted from many factors that don’t apply today.

While home values are falling quickly month over month, Kreamer said, they are still well ahead of where they were a year ago, as well as before the pandemic. The drop now is more typical and expected, compared to the unprecedented rapid rise of home values since the summer of 2020, which he called “unsustainable,” particularly in the ultra-pricey Bay Area. Now, things are returning to more “historical norms,” he said.

“It’s unlikely that home values fall anywhere near where they were pre-pandemic,” Kreamer said. “It would take a glut of inventory for home values to fall sharply, and we aren’t seeing any signs of that.

“Inventory is slowly growing as homes stay on the market longer, but new listings are down while homeowners with mortgage rates near 3% have little incentive to list and re-enter the market at today’s rates,” he said.

The next couple of months are the best time for home buyers to push for what they want, because as the market slows down with declining demand during the holidays, sellers are eager to make a deal, according to Carlisle. He added that it’s taking many homes longer to sell, helping shift the power to buyers.

“Home buyers should go out and aggressively negotiate their home purchases, while never pushing themselves beyond what they can comfortably afford,” Carlisle said. “Don’t worry about what the asking price is, but decide what you want to pay, and throw in an offer.”

Kellie Hwang is a San Francisco Chronicle staff writer. Email: kellie.hwang@sfchronicle.com Twitter: @KellieHwang