Normally, fall is the time of year when the real estate market starts to slow down. The leaves start changing color, the temperatures cool, and people become more focused on the holidays than buying or selling a home.

Last year, that didn't happen. The real estate market ground to a halt in the spring, normally the start of the busy season, due to Covid, then picked up and stayed active all the way through the fall and winter.

So what can we expect this year? In this blog post, I’ll share the latest predictions for the 4th quarter, especially as they relate to mortgage rates and home prices.

Watch the following video, or continue reading below, to learn more.

The real estate market has been on a tear since early last summer when we came out of the initial Covid lockdowns and was in a complete frenzy by early this year as dwindling supply, falling mortgage rates, and changing housing needs, with work and school all happening from home, driving buyer demand to new heights. As a result, home prices have soared and mortgage rates are starting to rise, causing many to wonder if they should put the brakes on their home-buying plans.

While only you can make the decision that’s best for you and your family, here’s what we’re expecting to see with mortgage rates, and home prices, in the 4th quarter and into 2022.

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Mortgage Rates

Record low mortgage rates have been one of the main factors driving buyer demand as the low mortgage rates have helped offset rising home prices. As of this writing, mortgage rates edged up over 3% for the first time in quite a while. They didn't go far above 3%, rosing to 3.01%, but psychologically it’s a big deal because we've all gotten accustomed to mortgage rates of 2.75%, 2.8%, etc.

However, we have to keep things in perspective. If we go back to January 2020, mortgage rates averaged 3.7% and how they have faired since then is shown on the following graph;

While we love to see these record-low mortgage rates, rising rates shouldn’t necessarily be viewed as a negative as they are a sign of a strengthening economy. While mortgage rates are widely expected to continue increasing, we aren’t expecting a dramatic increase. According to most forecasts, mortgage rates are expected to reach approximately 3.5% by the middle of next year.

What is important to point out is the impact mortgage rates have on your purchasing power as a homebuyer. A 1% increase in the mortgage rate decreases your purchasing power by 10%. For example, assume you’re pre-approved for $500,000 at a mortgage rate of 2.75%. If mortgage rates were to rise 1% to 3.75%, all else being equal, your pre-approval amount would be reduced to $450,000. Not ideal in a climate of rising home prices and one reason why it might not be a good idea to delay buying a home.

One reason some buyers have opted to wait is due to the belief that homes have simply become too expensive and unaffordable. What’s interesting about that is homes are actually more affordable today than they were in 2006 when prices peaked before the housing market crashed. Mortgage rates averaged about 6% in 2006 and according to the Federal Reserve, approximately 30 cents of every dollar of gross household income went towards housing costs for a median-priced home. Since 2006, the median home price has increased 41% while median household income has increased 55%. With mortgage rates averaging 3%, the Federal Reserve now calculates that only 19 cents of every dollar of gross household income is needed to cover housing costs.

It was also just announced that the conventional conforming loan limit for 2022 is being raised to $625,000, the largest single-year increase ever. That means only loans over $625,000 would be considered “jumbo” loans with higher interest rates.

Home Prices

As I just mentioned above, soaring home prices have caused considerable speculation, and concern, that we are at the top of the market and a correction is inevitable. The truth is that nobody knows for sure. What I do know is that market conditions now, and what has caused the rise in prices, is nothing like what we experienced in 2005, 2006, and 2007.

Bill McBride, who correctly predicted the last housing market crash, writes a blog called Calculated Risk, and recently had this to say about rising home prices;

Bill notes that he expects price increases will slow, that doesn’t mean he expects home prices will decline. He believes that the pace of appreciation will not continue at the 15% to 20% year-over-year rate we have been experiencing the last several months.

Ivy Zelman of Zelman & Associates believes something similar;

Ivy notes that she expects home sale closings to decline 10% in the second half of 2021. Understand that Ivy isn’t predicting that sales will decline due to a weakening of the housing market, but sales will decline because you can’t buy what isn’t for sale. There are simply fewer homes for sale this year than there were last year, meaning there can’t be as many sales.

When Ivy notes that home price appreciation will flip to a decelerating trend that could be misconstrued. Like Bill, she doesn't say home prices are going down, she says home price appreciation is going to flip to a decelerating trend. What that means is home prices, which have been on an accelerating trend month over month and year over year will start to taper off and accelerate at a slower pace. That's something I've been predicting for a while now based upon all the information that I have available currently.

The latest home price expectation survey was just released. The survey compiles the latest home price forecasts from the Federal Reserve, large financial institutions, investment banks, Fannie Mae, Freddie Mac, etc., and averages it into a single forecast. Here is what is being forecast through 2025;

While the pace of appreciation is expected to decline to more historically normal levels, it isn’t expected there will be any home price declines between now and the end of 2025.

When you look at these numbers on a cumulative basis here is how much home prices are expected to increase between today and December 2025;

If these pricing expectations hold true, a home valued at $500,000 today would be worth approximately $659,000 by the end of 2025.

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Bottom Line

Only you can make the decision on when the best time to buy or sell a home is for you and your family. With home prices expected to continue appreciating for the next few years, and mortgage rates already starting to rise, now might be the best opportunity to purchase the new home you’ve been thinking about.

If you currently own a home and are considering moving up to a larger one, the gap in value between the home you own, and the one you want to buy, will only increase over time. On the flip side, if you are considering selling and moving into a smaller, less expensive home, waiting won’t necessarily hurt you based on the information currently available.

Have questions or a specific situation you’d like to discuss in more detail? Schedule a Call with me. There is never a cost or obligation.