Today our real estate market faces rising rates which make the cost of mortgage financing more expensive. However, homes are still in short supply and demand is brisk. So where are we headed?
The last two years caught many of us off guard, and not just because of the pandemic. They also ushered in the hottest housing market on record. As a result, home prices rose nationally by nearly 19% in 2021. This appreciation has been driven primarily by low mortgage rates and a major supply shortage.1 Of course, local prices have risen much faster due to the seismic forces accelerating our economy.
But while some had hoped 2022 would bring a return to normalcy, the U.S. real estate market continues to boom. This despite rising interest rates and decreasing affordability.
So what is driving this persistent demand, and is there an end in sight?
Here are three factors impacting the real estate market right now. Find out how they could affect you. You may be impacted whether you are a current homeowner or plan to buy or sell a home this year.
Rising Rates: Mortgage Interest Costs Climb Faster Than Expected.
Over the past couple of years, prospective buyers have faced intense competition for new homes. This was in part due to historically low mortgage rates. Of course, the Federal Reserve’s efforts to keep the economy afloat during the COVID-19 pandemic caused this record shift in rates.
However, we now face a concerning level of inflation. Therefore, the Fed is reversing course and raising the federal funds rate. As a result, mortgage rates are rising as well. However, few experts predicted that mortgage rates would go up as quickly as they have.
In January 2022, the Mortgage Bankers Association projected that rates would reach 4% by the end of this year.2 By mid-April the average 30-year fixed mortgage rate had already hit 5%. That was quite a jump from around 3% just one year earlier.3 On a $400,000 mortgage, that 2% difference could translate into an additional payment of $461 per month.
Since then, mortgage rates have continued their upward trend. But what impact are rising rates having on demand? While many buyers had hoped for a cooling effect, experts warn that there is no sign of that yet.
Ali Wolf, chief economist at housing market research firm Zanda, had a conversation with Fortune magazine recently. In it he reported that, “Rising mortgage rates are having a counterintuitive effect on the housing market. Home shoppers have actually sprung into action in an attempt to buy a home before mortgage rates rise much higher.”4
Since inventory remains low, the resulting “race” has kept the homebuying market highly competitive, at least for now.
What do rising rates mean to you?
Current 30-year fixed mortgage rates reflect a sizable increase over previous months. But notably, they still remain well below the historic average of 8%.5 However, as inflation continues to impact our economy, the Fed is likely to raise rates further. Therefore, buyers may be wise to act quickly to secure the lowest mortgage rate possible. We would be happy to refer you to a lender who can help.
For sellers, speed is also of the essence. The pool of potential buyers may shrink as mortgages become more expensive. Additionally, if you plan to finance your next home, you’ll want to act quickly to secure the most favorable rate possible. Contact us today to discuss your options.
HOME PRICES KEEP CLIMBING
History shows that higher interest rates don’t necessarily translate to lower home prices. For example, home prices rose 5% between 1980 and 1982, in a period of significantly higher mortgage rates and inflation.5
Notably, forecasters expect that home prices will continue to climb throughout 2022, though they are expected do so at a slower pace. Of course, the 18.8% increase of the last 12 months is simply unsustainable.4 But Bank of America still predicts that prices will be approximately 10% higher by the end of this year. However, Fannie Mae estimates an even more accelerated rate of appreciation, 11.2%.6,7
In addition to limited supply and a race to beat rising mortgage rates, home values are also climbing because of positive economic indicators, like low unemployment.8 Additionally, rents are soaring, up 17% from a year ago, and this is prompting more first-time homebuyers to enter the market, increasing demand further.9 Add to that the continued popularity of remote work, and it’s easy to see why property prices continue to surge.
However, the news is not all bad for prospective homebuyers. Economists expect that as mortgage rates rise, the rate of appreciation will continue to taper. But the effect may be gradual.
“Eventually mortgage rates will slow down home prices,” according to Ken Johnson, an economist at Florida Atlantic University interviewed by Marketwatch.10 “We should not see continued rapid upticks in prices as mortgage rates rise.” Other forecasters agree. Fannie Mae expects price increases to slow to 4.2% in 2023.7
What does it mean for you?
While the pace of appreciation is likely to decrease next year, home prices show no signs of going down. However, current labor shortages are leading to higher salaries and better job opportunities for many workers. You may find that your income grows at a rate that outpaces home prices, making homeownership more affordable for you in the future.
For homeowners, the outlook is even brighter. You may find that you have built up a sizable amount of equity over the last two years. Contact us for a free home value assessment to find out.
INVENTORY REMAINS EXTREMELY LOW
As noted, one of the largest hurdles to homeownership is a lack of inventory. According to a February 2022 report by Realtor.com, there is an expanding gap between household formation and home construction. This has resulted in a nationwide shortage of 5.8 million housing units.11
The origin of this shortage dates back to the 2008 housing crisis. During that time, crashing home values led contractors to stop building new housing. Unfortunately, this trend has not fully reversed.12
The decline in home construction also resulted in a significant decrease in the number of people who make their living in the building industry. This trend was exacerbated by job losses during the COVID-19 pandemic. Now, many builders are finding it difficult to recruit qualified labor.
Another major challenge is a staggering increase in the cost of materials. Pandemic related supply chain shortages have been significant. As a result, home building material costs have risen by an average of 20% on a year-over-year basis. The price of framing lumber alone has tripled since August 2021.13
These trends add tens of thousands of dollars to the cost of a typical home. Of course, factors like a lack of buildable land and restrictive zoning have contributed to rising costs as well. Additionally, a shortage of developers is also contributing to the issue.14
To be sure, most homebuying experts agree that the lack of inventory is the primary factor driving rising housing prices. But accelerated demand also continues to drive an unprecedented competition for homes. Therefore, with available housing units near four decade lows, the end of the current housing boom is not yet in sight.15
What does it mean for you?
As prospective buyers, you should be prepared to compete for homes for the time being and expect low inventory to result in multiple offers. You may also be wise to expand your search parameters. If you’re ready to look, we’re ready to help.
For sellers, the picture is rosier. In this strong market, your home’s value may have increased more than you realize. Contact us to find out how much your home could sell for in today’s market.
WE ARE HERE TO GUIDE YOU
While national real estate trends can provide a view of the “big picture”, real estate is local. As local experts, we can offer insights that will help you to navigate the Ocala market. Our rapidly expanding equestrian industry is likely to drive home values in our community for some time.
If you’re considering buying or selling a home, contact us now to schedule a free consultation. Let us help you to assess your options and make the most of this unique real estate landscape.
“Rising rates and low inventories are balanced by record high employment and outstanding prospects for Ocala’s Economy! Additionally, before too long, economic forces are sure to seek to balance supply, demand and affordability and reach a sustainable equilibrium!”
Andrew Kruglanski, MBA, ABD, Broker
Marketwatch 1 – https://www.marketwatch.com/picks/home-price-appreciation-will-normalize-what-5-economists-and-real-estate-pros-predict-will-happen-to-home-prices-in-2022-01646940841
Bankrate 2 – https://www.bankrate.com/mortgages/mortgage-rate-forecast
CNBC 3 – https://www.cnbc.com/2022/04/16/heres-how-much-the-same-mortgage-costs-now-compared-to-last-year.html
Fortune 4 – https://fortune.com/2022/03/23/housing-market-interest-rate-economic-shock/
National Association of Realtors 5 – https://www.nar.realtor/blogs/economists-outlook/instant-reaction-mortgage-rates-april-07-2022
(B of A)Fortune6 – https://fortune.com/2022/03/16/home-prices-2022-2023-bank-of-america-forecast-mortgage-rates/
(FNMA)Fortune7 – https://fortune.com/2022/03/07/what-home-prices-will-look-like-2023-fannie-mae/
(Core Logic)Fortune8 – https://fortune.com/2022/03/17/home-prices-drop-housing-markets-california-michigan-massachusetts-corelogic/
CNN9 – https://www.cnn.com/2022/03/23/success/us-national-rent-february/index.html
MarketWatch10 – https://www.marketwatch.com/story/home-prices-increase-at-one-of-the-fastest-rates-on-record-but-higher-mortgage-rates-should-slow-future-growth-11648559497
Realtor.com11 – https://www.realtor.com/research/us-housing-supply-gap-expands/
NPR12 – https://www.npr.org/2022/03/29/1089174630/housing-shortage-new-home-construction-supply-chain
Investopedia13 – https://www.investopedia.com/housing-market-dips-in-early-march-2022-5222449
NPR14 – https://www.npr.org/2022/03/29/1089174630/housing-shortage-new-home-construction-supply-chain
Fortune15 – https://fortune.com/2022/03/14/housing-market-key-metric-inventory-zillow-bad-for-buyers/