Greg Englesbe
Mortgage News

Fast-Rising Mortgage Rates Are Lowering Some 2022 Real Estate Forecasts

Just as the coronavirus pandemic helped support some of the economic conditions for a surging U.S. real estate market, new global events have the ability to significantly alter the outlook of the housing market.

With the Fed beginning to raise U.S. interest rates more aggressively in response to inflation and Russia’s invasion of Ukraine, the effect on mortgage rates has been more sharp than many analysts had expecting heading into the year.

The average rate of the 30-year fixed mortgage climbed to 4.72% this week, a substantial increase from 3.85% for the week ending March 10. Compared to December 2020’s 2.68%, the wheels of a runaway housing market have now been degreased, to some extent.

The expectation among many forecasters heading into this year was that mortgage rate increases might price out some buyers and moderate list prices, but the core level high demand would maintain strong home price growth in 2022 as a result of strong competition and low inventory.

With more rate increases expected during the course of the year, experts are pumping the brakes on some of those earlier predictions.

Lawrence Yun, the chief economist for the National Association of Realtors, now expects mortgage rates to hover around 4.5% for much of this year, half a point higher than his initial projection of 4%. Yun also expects home sales to fall between 6%-8% this year, rather than the previous 3% projection.

The rising rates and low home supply will continue to put pressure on prices and disproportionately impact first time home buyers.

“That is a double whammy that erodes affordability for homebuyers, especially first-timers,” Frank Nothaft, chief economist at CoreLogic, told CNBC. “First-time buyers are a sizable part of prospective shoppers and their share of purchases has slipped from one year ago. We will be revising our home sales forecast a bit lower.”

There also are signs that home sellers are resetting their plans based on the unprecedented challenges for buyers.

“In a potential sign that sellers are mindful of buyers’ tightening budgets as mortgage rates climb, last week’s data showed the first slowdown in asking price growth since January,” Realtor.com chief economist Danielle Hale wrote.

Fortune’s Lance Lambert described the current state of the housing market as “uncharted water,” a scenario that has left some forecasters divided about the course of 2022.

While Zillow still projects year-over-year home price growth of 17.3% by January 2023, CoreLogic only foresees a 3.5% increase over the same period. From Fortune:

Why is CoreLogic’s model relatively bearish? Unlike Zillow, it predicts a greater pullback on the demand side. The sting of soaring home price growth during the pandemic was lessened, to a degree, by record low mortgage rates. Now that rates are returning to pre-pandemic levels, buyers will feel the full punch of record prices. That could finally create some pushback on the part of home shoppers.

The spring housing market, usually the highest-priced along with the summer, should give a good indication of where the U.S. market is likely to head this year and how much the rate increases will price out buyers.

At this particular moment, we could be looking at a compelling transition point from the market that has existed for most of the last two years.

Photo credit Jessica Bryant/Pexels.com

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