Dollars and Sense: Will Rising Mortgage Rates Help Cool the Housing Market?

The Paseo Financial Group

Since mortgage rates bottomed out in 2020, the housing market has been embroiled in fierce competition and skyrocketing home prices. For sale listings evaporated, with the limited supply driving multiple offers above asking and many of them all cash.

Times are tough for the average buyer, especially first-timers. Now, they no longer have the benefit of locking in the lowest mortgage rates on record and face forecasts of long-term growth.

* But while rising rates can hurt affordability, will they also help buyers by reducing demand?

* Will home price growth ever come down?

Housing values are expected to gradually slow down as 2022 progresses. Though early returns have not gone in that direction. Annual appreciation surged 19.1% in January, according to CoreLogic’s Home Price Index—the highest level of growth in at least 45 years. The rise in mortgage rates since January is expected to slow price gains in coming months.

The data provider projects January 2022 to be the peak for the current price boom, with the annual rate of change dissipating and eventually getting back to single digits by August.

Comparatively, January 2021 had an annual growth rate of 9.4% and CoreLogic forecasts January 2023 to slow down to 3.8%.

Buyers have continued to bid prices up for the limited supply on the market. However, the rise in mortgage rates since January further eroded buyer affordability and is expected to slow price gains in coming months.

The double-edged sword of increasing mortgage rates is as interest rates rise, they reduce affordability. While that makes home purchasing more difficult, it can also lead to fewer buyers in the marketplace. With lower demand, less upward pressure gets put on prices.

What goes up, must eventually moderate. Rising rates may be a housing market headwind in 2022, but as some buyers pull back from the market due to affordability and supply constraints, and as new construction adds more supply, house prices will moderate, resulting in a more balanced housing market.

As far as new construction goes, residential building permits totaled a seasonally adjusted annual rate of 1.899 million in January 2022, according to the Census Bureau. This increased from the December 2021 rate of 1.885 million and the January 2021 rate of 1.883 million.

Meanwhile, a seasonally adjusted rate of 1.638 million properties started construction in January, down from 1.708 million in December but up from 1.625 million the year prior. Increased for sale inventory will be a major key to reduced home price growth.

The importance of inventory is that rising interest rates will likely take some buyers out of the running and reduce demand. However, unlocking inventory would be a bigger factor in slowing the pace of home price growth.

The real estate market’s defined equilibrium is a six month supply of homes for sale. When it goes above that mark, the options are plentiful, and it becomes a buyer’s market. Anything below is more beneficial to sellers. January 2022 inventory measured 1.6 months, according to the National Association of Realtors.

Clearly, right now, we are well below a level of balance. Even an increase to three months’ supply would slow down appreciation.

Since the vast majority of the supply of homes for sale are existing homes and not new, slowing appreciation will be dependent on that supply increasing. I do expect more inventory to arrive as the spring/summer home buying season kicks in, but whether it will be enough remains to be seen.

What does that mean for us here in SaddleBrooke Ranch? The market currently has slowed down somewhat, i.e., houses are not selling as quickly on average as they did this time last year. What you must do if you are considering selling your home is to price it competitively. Also follow the Golden Rule of selling real estate—that is, declutter and depersonalize your home!

Douglas Sedam is the Owner/Broker of SBRanchRealty & The Home Loan Pros. He can be contacted at 520-829-5219 or [email protected].