If you’ve been sitting on the sidelines hoping for interest rates to drop or home prices to become a little more affordable, then I hate to be the bearer of bad news, but you’re going to be waiting a long time.

Much like many markets across US metropolitan areas, the Bay Area housing market has been in a state of freeze. Sellers are unmotivated to sell, as they’d be pushed into much higher interest rates upon repurchase, and buyers are struggling to cope with high interest rates.

As discussed in our previous article, interest rates and inventory in the Santa Cruz housing market are making it difficult to transact and holding housing prices high. What’s going to happen when rates inevitably drop?

Due to extreme supply constraints, we can confidently expect home prices to increase in the coming months as interest rates drop. Lower interest rates will bring more buyers to the market, increasing demand in a market that already has limited inventory.

Right now, we are in a market of opportunity. Home prices will likely increase in 2024. Buyers with the cash or the income to support a purchase are in a prime position to benefit from repressed housing prices.

Interest Rates Are On Their Way Down

In December, the Federal Reserve announced that while rates will remain stable for now, they expect three significant drops over 2024. A quick look at historical data of the Federal Funds Rate shows us that when the Fed has dropped rates, they have done it quickly.

Federal Funds Effective Rate

Source: FRED Economic Data

According to Trading Economics, the Federal Funds Interest Rate is projected to trend around 4.75 percent through 2024 but then drop to 3.75 percent in 2025. Many economists are saying that the Fed has successfully landed us in a “soft landing,” meaning that we have avoided a recession.

While a soft landing remains to be proven, it does appear increasingly likely. However, keep in mind that over the past 80 years, the Fed has not successfully brought inflation from above 5% (let alone 9%) to under 3% without causing a recession. So, we are actively waiting to see how the 2024 economy evolves.

In the case of a soft landing, interest rates won’t plummet as they did in previous rate hike periods. Instead, the Fed will bring them down gradually, keeping economic growth under control.

Developers Should Be Gearing Up

California is in a housing crisis and continues to grapple with tight supply, which worsens each year. Simply put, not enough homes are being developed to satisfy consumer demand. There are too many households, too much demand, and insufficient inventory.

Over the past year, developers understandably pulled back in the face of high interest rates, labor costs, holding costs, and overall increased risk. However, with housing prices primed to grow, now is the ideal time for developers to start filling their pipeline.

The Santa Cruz and surrounding housing markets are begging for more inventory, primarily attainably priced single-family homes and townhomes. Developers should be hunting for land and redevelopment opportunities while the market is subdued. Waiting months for lower interest rates will result in higher asking prices and a more competitive market.

Lower Interest Rates: A Window of Opportunity

Timing is an impactful variable in a successful real estate development. You must buy right to be able to fulfill your business plan. The current economic landscape presents a compelling opportunity for developers eyeing Santa Cruz and the Bay Area. The convergence of dropping interest rates and the unique market attributes of these regions creates an ideal scenario for initiating development projects.

Santa Cruz stands out for its robust economy, proximity to world-class employers and education providers, and lifestyle offerings. It’s become an escape for many Bay Area residents, leading to growing demand amongst buyers and renters.

As mortgage rates continue to fall, new developments in Santa Cruz will be met by robust demand. Furthermore, increased housing affordability will result in premium pricing.

By initiating developments now, investors not only benefit from immediate cost advantages but also position themselves to capitalize on the potential appreciation of their assets. Today’s market is a window of opportunity. By filling their pipelines now, developers are strategically preparing for the anticipated increase in demand.


As market conditions evolve, those looking to scale down their living space are in an advantageous position. In the Bay Area and Santa Cruz, where real estate prices are premium, downsizing can free up equity and reduce living expenses, offering a more comfortable and sustainable lifestyle.

High Equity Leads to Smaller Mortgages

The average US homeowner has more than $274,000 in equity (up significantly from the pre-pandemic level of $182,000), which is much higher for many Santa Cruz and Bay Area homeowners.

In December 2019, the Santa Cruz median home price was $821,500. As of the most recent data from November 2023, the median home price was $1,187,500. That’s an astounding $366,000 increase in just four years, or over 11% growth average annualized. Similar trends are happening across most Bay Area markets, including San JoseCupertino, and Los Gatos.

Santa Cruz’s home prices are even more impressive because the market has already experienced a sharp correction. Santa Cruz had -20.8% year-on-year growth, meaning that the median home price is considerably lower than last year. 2021 and 2022 were years of incredible growth for our coastal county. Impacted by interest rates and return to workplace conditions, the market was forced to correct. However, as interest rates drop, we expect them to increase again.

Those considering downsizing and who purchased pre-pandemic find themselves in an advantageous position, ideally sitting on a lump sum of equity. Housing prices remain strong, meaning you can expect a high selling price for your home. When you bring a large chunk of equity into your downsized home purchase, you effectively shrink your mortgage.

Downsizers shouldn’t shy away from current high interest rates. While they may have an attractive rate on their current property, monthly payments may still drop when taking on a smaller loan. Firstly, a high loan-to-valuehelps borrowers secure better financing conditions. Secondly, significantly reducing your principal loan amount has a significant impact on monthly payments.

For example, the monthly payment on a $600,000 loan at 3% is about $2,530. In comparison, the monthly payment on a $300,000 loan at 7% is about $1,995. Furthermore, downsizers often financially benefit from lower property taxes.

2023 Single Family Residences        
Month Current New Sold DOM Average Median
January 173 49 62 54 $1,258,306.00 $1,160,000.00
February 182 99 58 48 $1,289,582.00 $1,208,000.00
March 196 127 96 45 $1,313,754.00 $1,190,000.00
April 239 149 76 38 $1,411,795.00 $1,349,500.00
May 281 195 123 34 $1,552,680.00 $1,352,000.00
June 301 191 150 25 $1,382,727.00 $1,200,000.00
July 295 147 125 33 $1,490,218.00 $1,300,000.00
August 291 167 126 28 $1,300,675.00 $1,200,000.00
September 300 167 107 37 $1,276,118.00 $1,185,000.00
October 292 139 112 30 $1,389,972.00 $1,219,000.00
November 244 86 69 28 $1,680,923.00 $1,280,000.00
2022 Single Family Residences        
Month Current New Sold DOM Average Median
January 126 118 86 31 $1,395,064.00 $1,250,000.00
February 165 155 93 24 $1,576,006.00 $1,380,000.00
March 189 198 138 16 $1,661,158.00 $1,612,500.00
April 211 202 180 15 $1,575,410.00 $1,410,000.00
May 263 245 210 15 $1,368,438.00 $1,252,500.00
June 304 184 143 18 $1,478,658.00 $1,325,000.00
July 302 163 119 20 $1,379,071.00 $1,250,000.00
August 280 163 146 29 $1,433,534.00 $1,300,000.00
September 286 147 132 31 $1,456,270.00 $1,199,500.00
October 283 124 101 33 $1,450,447.00 $1,349,000.00
November 249 93 87 35 $1,327,120.00 $1,240,000.00
December 200 56 84 37 $1,444,570.00 $1,163,500.00
2023 Condo/Townhouses        
Month Current New Sold DOM Average Median
January 33 18 10 38 $842,083.00 $816,000.00
February 42 24 14 66 $818,750.00 $837,500.00
March 41 19 20 41 $864,131.00 $880,000.00
April 41 26 17 18 $950,033.00 $950,000.00
May 45 37 24 37 $711,538.00 $718,750.00
June 46 30 28 24 $824,743.00 $791,000.00
July 64 51 22 60 $792,733.00 $805,000.00
August 72 52 30 20 $848,366.00 $796,500.00
September 67 37 34 13 $873,746.00 $769,500.00
October 63 30 29 27 $893,689.00 $725,000.00
November 67 32 22 30 $762,608.00 $712,500.00
2022 Condo/Townhouses        
Month Current New Sold DOM Average Median
January 24 25 21 24 $924,433.00 $860,000.00
February 32 34 18 6 $857,791.00 $839,750.00
March 33 42 33 10 $879,240.00 $810,000.00
April 33 38 41 13 $1,041,177.00 $945,000.00
May 33 38 41 13 $1,041,177.00 $945,000.00
June 67 37 35 12 $858,164.00 $800,000.00
July 73 49 31 17 $850,151.00 $745,000.00
August 65 41 38 24 $838,430.00 $805,500.00
September 55 23 40 20 $885,375.00 $900,000.00
October 50 25 22 40 $988,431.00 $822,500.00
November 39 16 18 17 $920,231.00 $856,430.00
December 30 13 21 30 $811,619.00 $812,000.00

Waiting to Downsize Might Cost You More

I continue to emphasize that as interest rates drop, housing prices will increase. Lower interest rates will improve housing affordability, bringing buyers to the market in droves. Homes that will likely be most impacted by price increases sit within a comfortable affordability price point.

Downsizers who choose to wait might find themselves paying more for their new property than they would if they chose to move now. While you might have to secure your new property with a higher rate, as mortgage rates drop, you can refinance to lower your monthly payment. If we follow Trading Economics’ projections, those who buy a house in today’s market might be looking at a 6.8% interest rate but will likely be able to refinance to a sub-5% rate in 2025.

It’s worth paying an extra 1-2% in interest to save yourself far more in price appreciation. Downsizers who purchase now and refinance later will be considerably better off financially than if they wait for rates to drop.

Santa Cruz Attracts Out-of-County Downsizers

Residents of the Bay Area continue to seek more space and a better lifestyle. No longer enchanted by Silicon Valley’s hustle, many buyers are looking to coastal communities to financially downsize while upsizing their living conditions.

Part of Santa Cruz’s elevated demand stems from out-of-county buyers. Downsizing doesn’t have to mean moving to a smaller home, but it can mean downsizing on expenses. These buyers should take heed; lower interest rates will ignite the Santa Cruz housing market.

Now is the ideal opportunity for Bay Area residents to use their equity to purchase a Santa Cruz coastal home. Equity levels are high, and Santa Cruz’s market has already corrected. Buyers moving to Santa Cruz stand to benefit from appreciation.

Cash Buyers

In the Bay Area market, where Silicon Valley employees have amassed considerable stock portfolios, it’s no surprise that there are buyers able to make all-cash purchases.

Making an all-cash purchase isn’t always recommended, as it limits the tax benefits of a home purchase and locks equity in your home. However, it is an excellent way of securing real estate without suffering the cost of or having to qualify with current high interest rates.

The obvious benefit of buying all cash is that you avoid high-interest financing. However, cash buyers also have other advantages.

Cash buyers hold significant leverage in negotiations. Sellers often prefer cash deals as they typically involve fewer contingencies and can close faster. In a high-interest rate market, where financing becomes more expensive and cumbersome, the appeal of a cash offer increases, often leading to better deal terms for the buyer. In current market conditions, cash buyers find themselves in the position to secure the best possible deal on a home.

Furthermore, cash transactions can be completed much faster than those involving financing. Without the need for mortgage approval, appraisal, and additional lender-required inspections, the buying process is streamlined.

Buy with Cash Now, Refinance Later

If you’re purchasing real estate without financing, there’s no reason to sit back and watch prices rise. You’ll find yourself in a position of power, so take advantage of it. We are turning the corner of an inflammatory period, and the consensus among agents is that while buyer demand is subdued, there are still many sitting in the woodwork waiting to make their move.

Cash buyers will face higher purchase prices and increased competition as interest rates fall. Therefore, now is a time of opportunity for the finance-free purchaser. Prices have cooled over the past year. If you find a property that fits your needs, then it’s the right time to submit an offer.

But for many, finding the right property proves to be a challenge. Inventory remains incredibly restricted, so buyers need to keep their attention on the market and reach out to Santa Cruz agents with off-market listings.

What Will 2024 Bring?

What the coming year will bring depends on the economist you listen to and when their forecasts were made. Lower interest rates will likely help inventory levels increase somewhat; however, their benefit will be met by higher demand as mortgage affordability improves.

That said, the nationwide economy remains a considerable factor. Financial confidence is declining along with the average US personal savings rate, which has returned to pre-pandemic levels.

But the Santa Cruz housing market remains resilient, and price corrections are arguably ahead of neighboring markets. As mortgage rates fall, we look forward to refreshed buyer demand that puts gentle upward pressure on Santa Cruz real estate values.

Kelsey Heath

Kelsey Heath is a real estate content specialist with an extensive background in residential, industrial, and commercial property. She has been involved in the industry for a decade as a professional and personal investor, gaining a deep understanding of the market and trends. With a passion for written communication, Kelsey loves helping people understand the sometimes-complicated concepts behind real estate and is now a sought-out guest and ghostwriter.

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