How will higher interest rates impact the housing market?
May 12, 2022
As the Federal Reserve works to tackle elevated inflation through higher interest rates, would-be homebuyers will likely feel the strain of more expensive borrowing costs. Meanwhile, the housing market is likely to return to more normal pre-COVID conditions with fewer transactions and home prices increasing at a slower rate.
Those were several of the takeaways from Lawrence Yun, chief economist of the National Association of Realtors, who spoke to Realtors last week about how current economic conditions are affecting the housing market.
“Mortgages now compared to just a few months ago are costing more money for home buyers,” Yun said. “For a median-priced home, the price difference is $300 to $400 more per month, which is a hefty toll for a working family.”
Although mortgage rates may have already adjusted to future moves from the Federal Reserve, the recent spike in rates will impact housing budgets, even without additional increases.
“The mortgage rate has already responded to what the Fed is likely to do,” Yun said.
Yun calculates homes are 55% more expensive today when accounting for the cost of higher prices and interest rates compared to one year ago. For a $400,000 loan with a 3% interest rate, a buyer would have paid $1,686 per month last year for principal and interest. That increases to $2,606 per month this year with a $480,000 loan at a 5.1% interest rate.
In response, the number of cash buyers — who are unaffected by the higher rates — is at the highest level since the 2010-2012 period.
Because the additional costs will squeeze out some buyers, Yun is predicting the higher mortgage rates will slow the housing market. In fact, past data show that home sales do tend to decline when mortgage rates rise, but the decrease is not usually dramatic.
Yun expects unit sales to fall 9% in 2022 and home price increases to slow to 8%, down from the nearly 17% appreciation in 2021. Yun predicts home prices will grow 4% in 2023.
“This means that we may be dealing with unit sales activity down to pre-COVID days,” Yun said. “We had a huge surge; now we’re retreating back to pre-COVID days. Prices are still high; they are not retreating, … Then by 2023 sometime with job creation, home sales may return to positive territory.”
In fact, the current jobs situation will likely help the housing market.
“Even if there’s a recession, it looks like job creation will continue, which is important for the housing market,” Yun said.
In fact, Utah has more jobs today than before the pandemic — up 5.3% and the best-performing job market in the country.
For those who are worried about a housing bubble, another positive aspect is the fact that mortgage balances are not rising, even with increasing home prices.
“We’re clearly not in an excessive debt situation,” Yun said.
The housing shortage, which is not going away anytime soon, will also support home prices.
“After the over-production [of homes during the mid-2000s], we had under-production for almost 15 straight years,” Yun said. “So, the cumulative effect of under-production for 15 straight years is falling inventory, falling inventory, falling inventory.”
As America’s population rises, he said we need more housing construction to make sure opportunities remain available to those who want to become homeowners.
“Some of the demand will taper off just because we are in a rising interest rate environment, but the price increases certainly have been justified by the excessive demand and [lack of] supply,” Yun said.
To learn more about housing market conditions in your area, contact a local Realtor.