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Climbing Mortgage Rates Strain Buying Power in 2022
By Jordan Grice
Homeowners will likely look at the past year of mortgage rate performance with fondness or even regret as the days of historic lows fade.
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Based on recent Freddie Mac reports, 30-year fixed-rate mortgages (FRM) are breaking from months of sub-3% lows. Economists and real estate experts agree that recent upticks in rates mark an inevitable trend that’s likely to last well into next year.
“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.
Kan attributes that forecast to the relatively strong economic recovery the nation has experienced since the outbreak of COVID-19.
Another factor contributing to the upward pressure on mortgage rates comes from the Federal Reserve 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 among real estate pundits and stakeholders who 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.
As mortgage rates ascend, Kan 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.
Matthew Gardner, chief economist at Windermere Real Estate, says higher rates could also discourage some would-be buyers.
“One of the biggest things regarding the increase in rates is that they will act as a headwind to home-price growth,” says Gardner.
He explains that for every 1% increase in rates, 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.
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 Austin, Texas, Buddy Schilling, president of the Austin Division of JBGoodwin REALTORS®, says an increase in rates isn’t likely to harm activity in the area.
“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,” Schilling says, adding that an abundance of developable land and affordable home options will continue to make the 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,” Schilling adds.
Lynn Chute, vice president of HomeSmart Realty’s office in Denver, Colorado, expects rising rates to create some buyer hesitation. 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.”
A similar point was raised in a recent interview and virtual panel discussion conducted by CNN.
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 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.
“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 you’re going to find that the bureaucrats are going to be extremely cautious on raising rates,” 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 they can knowing that interest rates may edge up over time.” RE
– BARBARA CORCORAN Founder, Corcoran Real Estate
Jordan Grice is RISMedia’s associate online editor. Email him your real estate news to jgrice@rismedia.com.
