Experts say the days of mortgage rates below 3 percent will end next year as the Federal Reserve tries to combat inflation, which makes home buying more expensive, but cools down a bit from the hot Maine real estate market.
The confluence of factors will affect home prices and mortgage interest rates in the new year. Higher interest rates often cause banks to raise mortgage rates when borrowers refinance or start a new mortgage. Higher inflation means higher rates, which can lead to lower home prices. At the same time, prices tend to rise in times of high inflation.
The result of these conflicting trends, economists say, is that home prices will continue to rise, but not as quickly as they have been this year. Homes will be affordable for all cash buyers, but it will be more expensive for the vast majority of buyers who have to take out more expensive loans.
Mike Fratantoni, chief economist at the Mortgage Bankers Association, said in the latest Bangor Daily News webinar on real estate.
It will take at least two years to ease the prices. He said house prices are up 18 percent nationally at a time when overall inflation is up 6 percent and wages are up 4 percent, so home prices are way ahead of any other part of the economy. Some are waiting for the market to pull back before buying, but that won’t happen anytime soon.
“This, unfortunately, is our new normal,” said Courtney Mullins, vice president of the Bangor-area Realtors Association.
Fratantoni said the imbalance between strong demand and limited home supply existed before the pandemic, but has been amplified by a wave of millennials looking for housing and current owners wanting bigger homes. These factors also lead to higher prices.
Aaron Polster, president of the Maine Association of Realtors, said Maine also has a supply problem with about 25,000 fewer housing units it needs.
“That’s a lot in a place with 1.3 million people,” he said.
New construction slowed during the Great Recession, and Maine and other states have not continued building to meet housing demand since then, said Tim Wells, director of the Great Portland Community Land Trust.
The intensification of housing production may take two to three years. He said outdated municipal zoning regulations made it difficult and expensive to build. The state is trying to make it easier to build more homes, including with a new law this year that could boost small home construction.
Labor shortages and rising prices of building materials have also hampered new construction work. Fratantoni said supply chain restrictions are also extending a typical six-month construction loan for a new home to 24 months.
At the same time, fewer homes are being put on the market. Prices of single-family homes in Maine rose more than 15 percent to a median sale price of $270,000 last December compared to December 2019, according to the Maine Association of Realtors. Last November, the median sales price rose 11 percent to $300,000 compared to November 2020. But the number of homes sold fell 8 percent, the fifth consecutive monthly decline. That’s because the number of homes for sale was less than half what it was before the pandemic.
Higher rates could trigger a batch of refinancing before the Federal Reserve raises rates up to three times in 2022. The 30-year fixed-rate mortgage rate is expected to rise from a record low of 2.65 percent in December 2020 to 4 percent by the end of 2022, Fratantoni said. This would bring it back to its pre-pandemic rate. The current rate is 3.1 percent.
For someone who wants a 30-year fixed-rate mortgage for $300,000, an interest rate of 3.1 percent would mean paying $1,281 per month. At 4 percent at the end of next year, that monthly payment would be $1,432.
“A historically 4 percent mortgage rate is very attractive, but that increase should be enough to put the brakes on a bit,” Fratantoni said.
The confluence of factors that created the current situation of the housing market makes it difficult to solve. Increased production of housing of all kinds in the state could help, said Jeff Levine, director of the Maine Affordable Housing Alliance.
“It won’t happen overnight, but it’s definitely something that can help make it easier to buy your dream home,” he said.
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