Quick Take:

Mortgage rates reached a new high in early October, leading to a slow start for the housing market’s typically busy fall season. Some buyers have pulled back, while others are paying below asking price, opening the door for some who have been beaten out by cash buyers in recent years.

Fall is typically a busy time for the housing market, but it’s off to a slow start in Santa Cruz County, with home sales and prices weakening across parts of the region in September as soaring mortgage rates caused some prospective buyers to cool their heels.

The county saw 107 home sales in September, down about 15% from August, when there were 126 sales. The market was significantly quieter than in September 2022, when the county saw 132 home sales — or 19% more than last month. Sales activity fell the most in pricier markets such as Santa Cruz and Aptos compared to August, but rose in more-affordable Watsonville.

The countywide median sale price dropped 3.5% last month to $1.142 million, compared to $1.185 million in August. That’s in part because buyers purchased smaller homes on average, according to data from the Santa Cruz County Association of Realtors, but also because higher interest rates have deterred buyers from paying over the list price, said Coldwell Banker agent Jessica Wallace.

“Things are selling, but they’re on the market for longer and not many sales are going over the asking price,” she said. “On average, things are selling for about 98% of the asking price, which is actually a normal market.”

Wallace explained that in 2022 properties sold for an average of 102.4% of their asking price, and in 2021, things sold for an average of 104% of the asking price.

“It seemed like most properties had multiple offers, some had like 25 offers, which is crazy,” she said. “And it would be common to hear of properties routinely getting something like 10 offers.”

Mortgage rates hit their highest point in more than 20 years this month, with 30-year mortgage rates reaching an average of 7.63% last week, according to data from Freddie Mac. That compares to a recent low of less than 3% in 2021.

While mortgage rates have been hovering around 6-7% for much of the past year, the recent bump has been enough for some buyers to feel additional pressure.

“We’re seeing a little bit more of a lull than we’re probably used to, and rates going up a bit again didn’t help,” said Santa Cruz County Association of Realtors President Jennifer Watson. “That causes people to fall into a fear mentality and many start to pull back.”

Wallace agreed, saying that mortgage rate increases have proven to be “killing buyers’ affordability” in an already expensive market. “A person trying to put 20% down and looking at possibly an 8% interest rate is not fun,” she said.

The city of Santa Cruz saw 27 home sales in September, five fewer than in August. The average home sale involved a smaller property, causing the median price to dip from $1.532 million to $1.5 million. That’s still a 6% increase over September of last year.

Watsonville, which has been one of the busiest markets in the county, saw 20 home sales in September, three more than in August and four more than in September 2022.

The slight uptick in sales made Watsonville the second-busiest market last month — a spot usually occupied by Aptos. Aptos saw 17 home sales in September, eight fewer than in August.

However, buyers’ preference for smaller homes and fewer sales over asking price brought the Watsonville median sale price down significantly to $727,500 from $810,000 in August — about a 10% drop.

Realtors say the market slowdown isn’t all bad news, however. Watson explained that as some buyers pull back from the market, that can open the door for other buyers who have previously been outbid on properties.

“Especially with our lower-end market, some have been looking for three or more years and have either been beaten out by cash or people spending on a pandemic house,” said Watson. “Now, they have that time to negotiate a little bit more.”

Properties are also still selling despite the consistent upticks in mortgage rates. Some select properties are still drawing very high bids — Wallace cited a Seabright house that sold for $450,000 over list price in recent weeks.

“If you told me 10 or 12 months ago that rates would be where they are today, I would have said no one will be buying or selling real estate,” said Marvin Christie, co-owner and president of Anderson Christie Real Estate, adding that he too has seen some clients pull back because of high mortgage rates. “And here we are, still buying and selling real estate.”

And agents continue to look ahead to next year, when they still believe that rates will drop.

“I expected the short-term [rates] to stay steady and the long-term to start declining by now,” said Christie. “That hasn’t taken effect, but I still believe that it will. It’s just a matter of time.”

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Max Chun is the general-assignment correspondent at Lookout Santa Cruz. Max’s position has pulled him in many different directions, seeing him cover development, COVID, the opioid crisis, labor, courts...