Despite various expectations surrounding mortgage rates, the bottom line is that they will rise this year, leaving many wondering what this could mean for the housing market.
“The higher mortgage rates are one of the reasons we’re going from a sweltering housing market to a strong one, but instead of having ten bidders per open house, you’re getting two or three interested buyers,” said Michael Fratantoni, chief economist. at the Mortgage Bankers Association (MBA), in a recent interview with MarketWatch.
“We expected that to rise to about 4% by the end of 2022,” he said. “That’s definitely higher than we are today, but historically, the mortgage rate is still very attractive.”
Based on recent Freddie Mac data, 30-year mortgage rates rose to 3.22% by Jan. 6, maintaining an upward trajectory that experts expect to continue throughout the year.
The price increase is likely to push more buyers into the market in search of the best deal they can get before prices rise significantly, according to a recent survey by Redfin.
After surveying 1,500 U.S. residents, 47% of home seekers said they would feel more urgency to buy a home if mortgage rates rose above 3.5%, according to Redfin.
While the 4% MBA forecast has been on the higher end of expectations in recent months, Redfin chief economist Daryl Fairweather expects rates to be around 3.6% by the end of 2022.
“Increasing mortgage rates will make it less expensive to buy homes,” Fairweather said in a press release. Over time, this will put the brakes on demand and put an end to double-digit annual price growth. But in the short term, this increase will set fire to home buyers and make January very competitive.”
Improvements in the broader economy will help raise prices this year, according to Fratantoni, who noted that the gradual decline in unemployment and demand for workers will continue throughout 2022.
According to recent data from the US Department of Labor, unemployment fell to 3.9% in December, as the US economy added about 6.4 million jobs last month compared to the end of 2020.
The nation still needs 3.6 million jobs to reach pre-pandemic levels.
“We still have close to 11 million jobs in the economy and that huge demand for workers,” Fratantoni says, adding that unemployment will likely reach 3.5% by the end of the year with strong wage growth.
Another metric that people are concerned about is inflation, which has suggested that core inflation will remain high for longer than experts and experts have predicted, which will also add upward pressure on prices.
At the December meeting, the Fed indicated that they expect to implement three interest rate increases in 2022 and accelerate the taper process – curtailing asset purchases.
While expectations are for higher prices in 2022, Fratantoni also saw the idea that rates could drop during the year, particularly with the recent outbreak of the Omicron variant at the end of 2021 and the potential for a new variant to be up in the air.
He acknowledged the possibility of a short-term drop in interest rates, leading to a brief increase in refinancing activity. However, Franantoni noted that each variable appears to have less economic impact.
“We have reached a level of comfort at least before Omicron,” he added. “I think we’re moving through that in this case as well. We now have a set of tools that we use to deal with challenges with public health concerns that we can use again if a new variant emerges.”
Another possible outcome that Fratantoni ruled out is that prices could rise faster than expected, which he said could happen if high inflation did not subside.
“The Fed might really have to stomp on breaks instead of tapping gently on them,” says Franantoni. “We could see the rate path moving higher and faster than we had in our baseline forecast.”
With price hikes on the horizon, concerns surrounding affordability issues have risen — particularly among younger first-time buyers — especially when combined with soaring home prices in 2021.
“The year 2021 has seen an incredible growth in home prices,” Fratantoni says. “Honestly, if this goes on for too long, we are going to run away from first-time buyers who are really dependent on supply demand in this market,” he says.
While home prices will continue to grow in 2022, Fratantoni noted that the rise will not match the degree the industry experienced last year, falling from record low, double-digit growth to 6% or 7%.
Fratantoni expects buyer demand to remain strong despite rising prices and home prices.
“The job market is going to boom, and we will see the unemployment rate as low as it was in February 2020,” he said, adding that the demographic push of millennials will also play a role in keeping the market moving.
“The largest single group, millennials, are reaching peak home buying age,” Fratantoni continued. “This is going to generate a huge amount of demand because you have a group of young people in their early thirties looking to start their own household right now.”
Given the pace of new construction, he said the additional inventory this year should calm bidding wars in the market and provide a more convenient experience for first-time buyers despite higher prices and rates.
“They might be able to look at a couple of properties and have more than a few minutes to think about how to make that offer, so I think the buying process for this first time buyer is going to be a lot more fun this year although the price may be higher given what has happened to home prices.”
Jordan Grace is an assistant online editor at RISMedia. Send him your ideas of real estate news to firstname.lastname@example.org.