The 2022 housing market burst out of the gate like a Kentucky Derby racehorse, with home prices in most of the U.S. accelerating earlier and faster than expected.
Home buyers rushing to lock in a loan before the Federal Reserve raised the federal funds rate soon found themselves competing for an extremely limited supply of homes in many areas.
What Interest Rates Are Doing:
Mortgage interest rates jumped by over 1.5% in the first quarter of 2022, from just over 3% to 4.67%. By comparison, the Federal Reserve increased the federal funds rate by just .25% in March and .50% in May.
Why Rates Rose So Quickly:
The first quarter's 1.56% mortgage rate hike was the biggest three-month jump since 1994, and far higher than the Federal Reserve's comparatively modest .25% increase of the federal funds rate in March.
While a number of variables affect mortgage rates, many experts believe that lenders hurried to price in upcoming rate hikes proactively, allowing them to take advantage of a red-hot housing market before mortgage applications dropped off and profitability took a hit.
What Experts Predict:
As usual, expert opinions are divided. :)
Home Prices:
Zillow's April forecast called for U.S. home prices to go up 14.9% by April of 2023. CoreLogic, a data and analytics company, expects to see 5.9% yearly appreciation by March 2023.
This is a notable drop from the 20.9% appreciation that CoreLogic reported between March 2021 and March 2022.
Mortgage Rates:
Many financial experts expect mortgage rates to reach 5.2% to 6% by the end of the second quarter, according to a
report by Bankrate.com.
The Federal Reserve plans to raise the federal funds rate several more times this year, but mortgage rates won't necessarily increase by the same proportion and some experts have noted that they could even dip slightly if inflation appears to come under control. It's still an "all bets are off" situation at this point, however.
2022 vs. 2007:
It's normal to wonder if we're approaching the same type of scenario that led to economic troubles in 2007. Home price appreciation has been on a tear, and now forecasters are starting to impart words of caution about what to expect in the next few years.
There are key differences between then and now, however.
Housing Supply Is Lower.
There are far fewer homes for sale now than there were in 2007 and 2008, with builders currently struggling to fill a backlog.
More Loans are Fixed-Rate Mortgages.
The proportion of adjustable-rate mortgages is much lower because so many homeowners either bought with or refinanced into a fixed-rate mortgage.
Borrowers Are Better Qualified.
Financing guidelines are stricter than they were before 2008, which means that homeowners are less likely to default on their mortgages.
The Bottom Line:
Higher rates always have some kind of cooling effect on home prices. How much of an effect - and whether it results in decreasing prices or simply a decreasing rate of appreciation - depends on competing factors, including the supply of homes, the performance of other markets, and consumer sentiment.
At this time many experts expect the housing market to cool down but to also remain relatively strong due to low supply, interest rates that are
still comparatively low, and high homeowner equity.
Mortgage Loan Shopping Tip:
Find out if you're paying Discount Points.
Discount points buy down the interest rate by paying interest in advance at closing. One point usually equals 1% of the loan amount and reduces the rate by .25%.
In order to compare loan estimates, it's important to know if the quoted rates involve the borrower paying discount points or not.
You can determine at what point in the loan term discount points will produce a benefit by dividing the cost of the points by the amount they reduce your monthly payment.
For example, if you pay $3,000 in points on a $300,000 loan to reduce your rate from 5.0% to 4.75%, the monthly payment drops by around $45.
You would need to hold the loan for 67 months ($3,000 divided by $45) in order to recoup the $3,000 and start seeing a net gain.
