Mortgage rates have jumped quite substantially over the past couple of weeks after essentially treading water since September 2021. The question now is, will rising mortgage rates be enough to cool the housing market in 2022?

We’ve been fielding a lot of calls from nervous home buyers wondering what it all means. Inflation is at a 40 year high and now mortgage rates have spiked. To a certain extent, we are all creatures of habit and don’t feel comfortable when things start to change too much.

In this blog post, I provide some perspective for you by taking a look at how today’s mortgage rates compare to years past and let you know what you need to be focused on when it comes to where mortgage rates are likely heading in the months ahead.

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

I don’t know many people that are comfortable with change, but what I find is most people tend to respond in one of two ways - they act or they pause!

That’s exactly what we are seeing in the housing market currently. Some potential home buyers played a waiting game in 2021, waiting to see if the market would cool or home prices would fall. Neither happened. Home prices have continued to rise and now that mortgage rates are rising these buyers have chosen to jump in before they potentially get priced out completely.

Other buyers that might have dipped their toe in the water recently, but never jumped in (you know who you are😀) are now even more nervous by current events and taking it as a sign the market is too volatile and believe they are better off waiting.

Whichever group you are in is fine. I’m not here to try and convince you one way or the other. My goal is simply to provide the information and help you interpret that information, so you can make the best decision for you and your family.

Truth is, the housing market needs to see some potential buyers exit the market, even if temporarily, to give supply a chance to catch up and bring some balance back so every home is not receiving multiple offers and the subject of a bidding war.

A Historical Perspective

Even though mortgage rates are on the rise, it’s important to understand that they are still incredibly low from a historical perspective. 30 year fixed rate mortgages under 3% is definitely not normal and many experts have argued has actually been hurting the housing market overall.

The following chart shows the change in mortgage rates from January 2020 to today;

Note that I’m using data from Freddie Mac in my examples. Different sources will quote different rates based on points, fees, and other criteria, but the overall trends are the same.

In January 2020, mortgage rates were just over 3.7%. The housing market was strong and 2020 was shaping up to be another good year.

When the pandemic hit and everything shut down, mortgage rates tumbled. The decline in mortgage rates from April 2020 until January 2021, when we hit an all-time record low of 2.65%, is one of the factors that contributed to the real estate frenzy we have been experiencing for the past year. Rates today are just now getting back to where they were before the pandemic and were considered low at the time.

Now, let’s pull back a little farther and take a look at mortgage rates between January 2018 and now:

Even though they have risen, you can see mortgage rates today are still better than what we experienced between January 2018 and January 2020.

Everyone, me included, tends to have short-term memories, especially on topics as exciting as mortgage rates! Considering we have been in an ultra-low mortgage rate environment for almost 2 years, that is what we have become accustomed to. That doesn’t mean it should be considered the new normal though.

What About Affordability

Considering how much home prices have risen over the same period of time, affordability has definitely been impacted and will continue to be impacted as mortgage rates rise. Less affordable doesn’t mean unaffordable, however.

Wages have grown over the same period of time and when all factors are considered, the monthly housing expense as a percentage of monthly income is still below historical norms. Nevertheless, it’s something that needs to be factored in and is one of the reasons home price appreciation is starting to moderate.

Sam Khater, Cheif Economist at Freddie Mac says:

As Sam says, as mortgage rates rise there will be an impact on demand, but supply has been lacking for years and continues to be the biggest factor behind rising home prices.

New home builders built more new homes in 2021 than any year since 2006 and even more are expected this year and it’s still not expected to be enough. The current rise in mortgage rates is more likely to cause refinances to decline than the demand for new homes, which is why purchase origination is expected to rise again in 2022.

Rising mortgage rates should also help bring more resale homes onto the market. As I’ve mentioned previously, many potential sellers, who would normally sell their current home and use that money as a down payment on their next home, chose to keep their existing home, do a cash-out refinance, use that money to fund the purchase of their next home, and turn their existing home into a rental. Ultra-low mortgage rates made that possible as rising rents helped make sure the now rental home was cash flow positive.

That is harder to do as mortgage rates rise which is why Sam notes that refinance volume is expected to fall sharply this year.

Now that we’ve seen how mortgage rates have changed over the past 4 years, let’s take a look at what mortgage rates have averaged over the past 50 years;

Quite a difference when you compare today’s rates to decades past.

As you can see, we’ve been in a falling rate environment since the 1990s. Most of the experts are predicting the range we will settle back into long-term is between 4% and 5%. Even though rates have jumped to start the year, the latest forecasts I have seen are still calling for rates to end the year around 4%.

If that changes I will be sure to let you know.

The Key Metric to Watch

When most people think of interest rates they think of the Federal Reserve. You may have read a report, or seen on the news, that the Federal Reserve is expected to raise interest rates 3 times this year.

If mortgage rates are already inching closer to 4%, and the Fed hasn’t raised rates yet, how can mortgage rates end the year near 4%?

A great question, but when the Federal Reserve raises interest rates it doesn’t directly impact mortgage rates. The rise in interest rates will affect your savings account, car loans, credit cards, store financing, etc.

Mortgage rates are actually closely tied to the yield on the 10-year Treasury Bond. Here is how the yield on the 10-year Treasury Bond has changed over the past few weeks;

Looks pretty similar to have mortgage rates have changed over the past few weeks doesn’t it?

This chart shows the relationship between mortgage rates and the 10-year treasury over the past 30 years;

The blue line is the 10-Year Treasury Rate and the green line is the 30-year mortgage rate. They look like dancing partners, don’t they?

The average spread over the past 30 years is 1.7, meaning the 30-year mortgage rate is approximately 1.7% higher than the 10-year Treasury Rate.

Want to know where 30-year mortgage rates are heading? Keep an eye on the 10-year Treasury rate.

Bottom Line

Hopefully, this helps provide some perspective on where mortgage rates today are compared to historical averages and gives you a sense of what to expect in the months and years ahead.

If you have additional questions, or a situation you would like to discuss in more detail, please give us a call at 469-296-5230 or email Contact@S2RealEstateTeam.com