WRITTEN BY: MAX FITZGERALD
JANUARY 2022

Two opposing economic forces are impacting the housing market right now: rising mortgage rates and a record low supply of homes available to purchase.

Historically, a rise in interest rates correlates to a "cooling" of the real estate market. Buyer demand begins to slow causing inventory levels to rise. Generally speaking, this shifts the market from a hot seller's market, to a much more balanced real estate environment.

Will the recent upswing in mortgage rates be the catalyst to balance this very one-sided real estate market?

Let's examine the facts.

Rising Interest Rates vs. No Inventory

Rising Mortgage Rates

Since ringing in the New Year, mortgage rates have been steadily climbing, eroding home affordability. According to Freddie Mac's Primary Mortgage Market Survey, rates have risen from 3.05% on December 23rd to 3.56% as of January 20th, up half a percent in just 4-weeks.

Throw in a volatile stock market, and many are beginning to wonder if these changes are just the beginning of the end to the pandemic run on the housing market.

Why the Raise in Rates?

Investors and Wall Street had already digested the fact that the Federal Reserve was tapering their purchases of Mortgage-Backed Securities and were going to be raising the Short-Term Federal Funds Rate (tied to automobile loans and credit card debt, and NOT to 30-year mortgages) starting the March. Additionally, they just announced that they were going to be draining their balance sheets, which was unexpected.

The Federal Reserve went from calling inflation transitory and doing nothing a few months ago to acknowledging that it was an issue and that they were going to do everything in their power to slow inflation's grip on the economy. As a result, the markets reacted and rates rose by a half percent in 4 weeks.

The Impact of Rising Interest Rates

The rise from 3.05% to 3.56% is an additional $252 per month for a $900,000 mortgage, or $3,027 per year. However, with such a limited supply of available homes, the impact is not being felt on the street. Today's rate may be the highest since the start of the pandemic, but it is still a really great rate in a historical context.

Homes are still flying off the market as fast as they are coming on. Tons of buyers are waiting in line for the opportunity to see a home. After receiving 10, 20, 30 offers on a home, the sellers are calling all of the shots, sales prices exceed their asking prices, and home values continue to rapidly rise.

Why is the Rise in Rates Not Slowing the Market?

The answer is simple: rates have not climbed high enough to materially slow demand. Mortgage rates climbed considerably in both 2013 and 2018, which caused a shift in the market. Demand cooled, the inventory increased, market times grew, and the market slowed from a Hot Seller's Market to a much more balanced market. In 2013, rates rose from 3.34% to 4.57%, and in 2018 they rose from 3.99% to 4.94%.

The recent runup in rates is much smaller. If they continue to climb, then the market could cool. But, for now, Wall Street and investors have digested the Federal Reserve moves and they most likely will not rise much more from here. Rates would need to climb to 4% or higher to slow housing.

At 4%, the difference in payment for that same $900,000 mortgage example would be $478 more per month, or $5,739 per year. At 4.25%, it would be $608 more per month, or $7,299 per year.

The Bottom Line: The recent 4-week rise in interest rates had no real impact on the current market.

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It will be important to watch how mortgage rates unfold in the weeks and months to come. Until rates rise substantially from here, it is business as usual - an insanely hot housing market heavily favoring sellers.

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