As rising mortgage rates continue to cool the housing market across the U.S., the Bay Area in July saw the largest monthly drop in home values of anywhere in the country, according to a new report from home listing site Zillow.

The average value of a single-family home in the San Jose-Sunnyvale-Santa Clara metro area fell 4.5% from June to July to $1.56 million. Home values in the San Francisco-Oakland-Berkeley metro, meanwhile, decreased 2.8% to $1.44 million.

Compare that to a 0.01% dip in value nationwide to $357,000.

Jeff Tucker, a Zillow senior economist, said it’s not surprising the Bay Area is experiencing the sharpest declines as mortgage-rate spikes squeeze buyers out of the market.

“The number one reason is that it’s the most expensive place in the country,” Tucker said. “Buyers were already stretched to the breaking point.”

Over the past two-plus years during the pandemic, Bay Area home values soared as house hunters — many untethered from the office by remote work and buoyed by historic-low mortgage rates — were locked in a mad scramble for homes, sometimes bidding hundreds of thousands of dollars over the asking price.

But as the Federal Reserve raised the cost of borrowing in recent months in a bid to slow runaway inflation, mortgage rates have spiked accordingly, cooling the frenzied demand and record-high prices. Currently, the average interest rate for conforming and jumbo 30-year fixed home loans is between 5% and 6%. While rates have dipped in recent weeks, they’re still around double the sub-3% rates available during the depths of the pandemic.

Even that small percentage increase in mortgage rates can have a drastic impact on the true cost of actually buying a home.

Compared with July 2019, the mortgage payment on a typical home in the San Jose metro is up 60% to $8,371 a month (including taxes and insurance), according to the report. That’s more than double the median rent of $3,369.

For the San Francisco metro area, the average mortgage payment is $7,623, up 56% from three years ago. The median rent in the area is $3,277.

Other regions that saw significant monthly declines in home value last month include Phoenix (minus 2.8% to $470,800); Austin, Texas (minus 2.7% to $566,533); Sacramento (minus 2.5% to $611,287); Raleigh, North Carolina (minus 2.5% to $457,006); and San Diego (minus 2.5% to $894,246).

In addition to rising interest rates, Tucker pointed to the region’s relatively large remote workforce and stock market declines draining the portfolios of tech workers as cause for the buyer pullback. Some Bay Area tech companies, including Coinbase and PayPal, have also laid off at least hundreds of workers.

“Suddenly, they found their budgets were much smaller than they were expecting,” Tucker said.

Ramesh Rao, a real estate agent in the South Bay, said there are still plenty of local buyers looking for homes in good condition — sellers just need to adjust their expectations after two years of growing home prices.

“The main thing that is driving the market these days is accurate pricing,” Rao said.

The share of listings with a price cut in the San Jose metro area in July was 19.5%, compared with 13.5% in June, according to the Zillow report. In the San Francisco metro, the share of reduced listings was 17.5%, compared with 12.5% the month before.

The falling demand means more homes are staying for sale longer, boosting inventory across the region and further driving down prices. But Rao said that dynamic could be shifting.

“A lot of the sellers are saying, ‘You know what, I’m going to take the property off the market — I’ll come back another time,’ ” he said.