Year-End Outlook: Climbing Mortgage Rates Strain Buying Power in 2022

Editor’s Note: RISMedia’s Year-End Outlook series provides an in-depth analysis of the housing market’s leading indicators for economic health, and showcases expert insights on what’s to come in 2022. 

Homeowners will likely look at the past year of mortgage rate performance with fondness or even regret as the days of historic lows fade.

Based on recent Freddie Mac reports, 30-year fixed-rate mortgages (FRM) at 3.14%, are breaking from months of sub-3% lows that captured headlines throughout 2021. Economists and real estate experts agree that recent upticks in rates mark an inevitable trend that is likely to last well into the next year as the housing market heads toward its post-pandemic equilibrium.

“We expect a somewhat gradual increase throughout the rest of this year and going into 2022,” says Joel Kan, chief economist at the Mortgage Bankers Association (MBA), which expects rates to climb gradually to nearly 4% by the end of next year.

While that serves as the highest prediction compared to other reports, that isn’t far off from the consensus that rates will fall somewhere between the mid-to high-three percentile by the close of next year.

Kan attributes that forecast mainly to the relatively strong economic recovery that the nation has experienced since the outbreak of COVID-19 in March 2020.

Another factor contributing to the upward pressure on mortgage rates comes from the Fed, and their plans to address higher inflation by tapering asset purchases, according to experts from the National Association of REALTORS® (NAR).

“The Federal Reserve is getting nervous about rising and persistently high inflation rates,” says Lawrence Yun, NAR chief economist. “Therefore, the Fed will be tapering the purchases of mortgage-backed securities later this year and raising short-term interest rates in 2022.”

Market Implications

The impacts of higher mortgage rates have been discussed at length among real estate pundits and stakeholders that have raised concerns that higher rates would pause market activity.

Yun admits that higher rates will shave home sales modestly, but he doesn’t think it will be drastic. His colleagues echoed similar sentiments, but also note that higher rates will play a larger part in persisting affordability challenges.

“Typically, we say that an increase in rates, at least if it’s not too severe, doesn’t tend to impact demand quite as much because if someone is looking to buy a home, interest rates and mortgage rates are one part of the equation,” Kan says, pointing to record-level home price appreciation as another factor straining buyers.

As mortgage rates ascend, Kan also indicates that refinancing activity will likely take a substantial hit, dropping by more than 60% in 2022.

“We’ve been in this lower rate environment for the last year and a half, and we’ve seen a lot of refinances,” he says, noting that 2020 was a banner year for mortgage originations and refinancing under record low rates that lasted well into 2021.

Matthew Gardner, the chief economist at Seattle-based Windermere Real Estate, says higher rates could also discourage some would-be buyers that have grown accustomed to the “artificially low mortgage rates” of the past year and a half.

“One of the biggest things regarding the increase in rates is that they certainly will act as a headwind to home-price growth,” says Gardner.

He explains that for every 1% point increase in rates, that buying power for consumers declines by roughly 10%.

However, despite the increase in rates, Gardner doesn’t see a cause for concern in the market, which he suggests will remain competitive with a persisting supply-demand gap as mortgage rates are still relatively low, when compared to previous years.

Historically, Gardner says the long-term average for mortgage rates since the 30-year FRM was established has been around 7.5%, with the last peak of 4.87% occurring in November 2018.

“It is still remarkably low when you consider it in the bigger picture,” Gardner says.

Buyer Behavior 

Considering the prognosis for mortgage rate increases in 2022, real estate brokers and leaders have mixed feelings about how buyers are likely to react in the cooling market with additional strain affordability.

In Austin, Texas, Buddy Shilling, president of the Austin Divisions of JBGoodwin REALTORS®, says an increase in rates isn’t likely to harm his activity in the coveted area, which has seen an increase in significant employers migrating into the Texas city.

“If the rate climbs, Austin is in a good position because many of the new jobs being created in the city are higher-paying ones,” Shilling says, adding that an abundance of developable land and affordable home options will continue to make the Texas city a desirable destination for buyers.

“Even if the interest rate goes up, less expensive, affordable homes will be available just a few minutes away,” Shilling adds.

Lynn Chute, vice president of HomeSmart Realty’s office in Denver, Colorado, expects rising rates to create some buyer hesitation in her market. However, she says the pause in buying will be short-lived, with still relatively low rates up for grabs.

“Buyers will need to make some adjustments, but the ultimate goal of homeownership is still well within reach,” Chute says. “With the drastic increase in rental rates, the benefits of homeownership still outweigh the cost of renting, even with a small rate increase. Buying a home continues to be one of the best long-term investments you can make.”

A similar point was raised in a recent interview and panel virtual panel discussion conducted by CNN that featured real estate leaders offering their market predictions.

The interview featured Barbara Corcoran, founder of Corcoran Real Estate. The subsequent panelists were Glenn Kelman, CEO of Redfin; David Doctorow, CEO of realtor.com®; and Ryan Williams, founder and CEO of Cadre.

Corcoran noted during her interview that rising mortgage rates would add to affordability issues that are already straining the market and squeezing buyers out.

“When you do the math on what you pay for your monthly expenses on a house with a 1% increase in mortgage rates, it’s substantial,” she said, noting that aspiring buyers waiting to enter the market may be at risk of being left behind as overall living expenses increase.

When asked if she thought rising rates would dissuade people who have gotten used to low rates, Corcoran said, “I don’t think there is cause for panic.”

“I don’t think any financial expert is predicting that rates are going to spike,” she said while also opining on the Fed’s plan to incrementally increase interest rates and the potential implications to mortgage rates.

“It’s in everyone’s interest to keep the housing market going, so I think that you’re going to find that the bureaucrats are going to be extremely cautious on raising rates, but they will raise rates, but I don’t think the climb will be fast and furious,” Corcoran said.

Doctorow agreed with Corcoran’s sentiments, stating, “As consumers think about affordability, it’s really important to understand the two factors—the price of the home and the mortgage rates—together and ultimately try to put themselves in a position to get the most home that they can knowing that interest rates may edge up over time,” Doctorow added.

Jordan Grice is RISMedia’s associate online editor. Email him your real estate news to jgrice@rismedia.com.

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