What in the world is going on with mortgage rates?

They have already blown past the level experts thought they would be by the end of 2022 and are continuing to rise.

How will this rapid rise in mortgage rates impact our local real estate market and could these rising rates cause home prices to fall?

Continue reading below, or watch the following video, to learn more about what to expect for the remainder of 2022.

Mortgage Rates Up, Home Prices?

Mortgage rates have been on the rise since the beginning of the year but over the past couple of weeks rates have increased sharply.

If you happened to see any of my blog posts or videos from the end of 2021, you might recall that I discussed the fact mortgage rates were expected to rise in 2022. At that time, the consensus among the experts (4 out of 5 dentists😀) was mortgage rates would end 2022 somewhere between 3.5% and 4%.

So how is it we are just under 4.5% and aren’t even through the 1st quarter?

Here’s a look at how rates have increased since January 1st;

One thing about making predictions is you never know what the future holds. I think it’s safe to say that some unexpected world events have taken place here in the 1st quarter.

With that in mind, I am always careful when I share an opinion on what the housing market is likely to do in the future by saying “assuming nothing unexpected happens.”

The lockdowns as a result of the COVID pandemic in 202 were another recent example of something unexpected happening. At that time, the predictions were the housing market would crash and we would see a tsunami of foreclosures as we saw in 2008. That obviously didn’t happen. The real estate market did just the opposite and has continued soaring.

Here’s what Sam Khater, Chief Economist at Freddie Mac had to say last week;

Please note that when Sam is talking about the Federal Reserve’s actions here he isn’t referring to the Fed raising interest rates like they did recently and are expected to do multiple more times this year.

When the Fed raises interest rates, car loans, consumer loans, credit cards, etc. are affected, not mortgage rates directly. What Sam is referring to is the Fed tapering the governments’ purchase of mortgage-backed securities.

When the housing market crashed in 2008, one of the contributing factors was a lack of liquidity in the mortgage market. By purchasing mortgage-backed securities the Fed is helping to keep the mortgage markets liquid. This was implemented following the COVID lockdowns in an effort to support the economy. Given the strength of the economy today, that is no longer needed.

Sam also refers to geopolitical events, which is basically the Russian invasion of Ukraine. Whenever there is uncertainty in the financial markets, money generally flows out of stocks to bonds, which are considered safer.

The inflow of money into the bond market impacts the rate of return, including the rate on the 10 year Treasury Bond, which mortgage rates are closely tied to.

Mortgage rates are not expected to keep moving up as fast as they have been, however, as much of the anticipated future demand has already been priced in to current rate increases;

The Impact on Home Prices

While it’s natural to think the increase in mortgage rates could push home prices down, that usually doesn’t happen.

Back to Sam one last time. At the end of his quote, he mentioned “weakening consumers’ purchasing power” which is really talking about affordability. While homes are definitely less affordable now than they were last year, that doesn’t mean homes are unaffordable. Homes today, when you look at mortgage payments as a percentage of household income, are actually more affordable today than they were in 2007.

As I’ve mentioned previously, home prices are directly related to the amount of demand vs supply in any given market. Demand here in Frisco and Prosper remains very high against incredibly tight supply.

A real estate market is considered balanced when there is a 6-month supply of homes for sale. Currently, we have approximately 2 to 3 weeks of supply.

CLICK HERE to see the latest Frisco Market Report

That isn’t to say rising mortgage rates won’t impact our local housing market, they will. What we should expect to see is the pace of appreciation come down from the record levels experienced over the past couple of years.

The group of buyers that is being impacted the most are those trying to buy their first home. Not only have smaller, entry-level homes been in short supply, but bidding wars have also made it incredibly difficult for buyers, especially those who don’t have excessive funds to cover appraisal shortages, to compete.

A couple of months ago, condos priced below $200,000 were relatively easy to find compared to single-family homes. Those properties would sit on the market a little longer and seldom had bidding wars.

Lately, those properties are in much higher demand as buyers who initially wanted to buy a 3 bedroom, 2 bath single-family home are finding them unaffordable and turning to condos as a more affordable option to get into the market.

Bottom Line

Don’t be fooled into thinking the housing market is slowing down by reports of declining home sales in the coming weeks. Home sales aren’t declining due to the real estate market turning down, but are declining because there is not enough inventory to sell.

Rising mortgage rates will start to have an impact on demand, while more sellers are expected to return to the market, which will help to create a little more balance and should loosen conditions up slightly as we move forward in 2022.

While I do expect the pace of home price appreciation to moderate, there is nothing to indicate home prices themselves will come down. I do believe we will start to see some price reductions, however, but those will mainly be on properties that were priced optimistically in the first place, rather than an indication of a decline in the overall market.

If you have additional questions, or a specific situation you would like to discuss in more detail, please give us a call at 469-296-5230 or email Contact@S2RealEstateTeam.com and we’d be happy to schedule a complimentary call with you.