Real Estate

March 09, 2022

WRITTEN BY: MAX FITZGERALD
MARCH 2022

A new trend has emerged this year - the dreaded rising of mortgage interest rates.

Since the start of the year, 30-year fixed rates have risen from 3.05% to 3.92% as of February 17th, nearly a full percent higher in only 8 short weeks. Despite the rise in rates, the real estate market remains extremely hot. It is quite common for sellers to have 10, 20, 30+ offers in hand, and to call all of the shots at the negotiating table.

Buyers are starting to feel the pressure of rising mortgage rates, and have become incredibly incentivized to purchase a home so that they can lock in an attractive mortgage interest rate. This increased buyer activity, coupled with an overall inventory shortage, has created an unbalanced and one-sided real estate market.

In order to try and forecast what 2022 might look like, it's worth taking a look at how the real estate market performed in 2013 during a very similar period of time.

2013 | The Rise of Interest Rates

The trend in rising mortgage rates has occurred before and eventually led to a market change in 2013.

Similar to today, there was a very limited supply of available homes to purchase. The Expected Market Time (the time between a house being placed on the market and accepting an offer) declined from 53 days in January to 39 days by the end of March. At the same time, mortgage rates rose from 3.34% to 3.63%. Despite the rise in interest rates, buyer demand became stronger.

However, as more homeowners opted to list their homes during the spring, the number of available homes began to rise substantially for the first time in nearly two years (roughly a 27% increase in inventory). Also during the Spring, mortgage rates had climbed from 3.5% to 3.93%.

2013 | The Summer and Autumn Markets

Active housing inventory continued to grow through the Summer and Autumn Markets, and did not peak until the end of October. The real estate market is historically very cyclical, and is closely correlated to seasonality. A typical peak in inventory occurs sometime between July and August. Housing inventory begins to dwindle in the Fall and Winter Markets as the kids go back to school and the holiday season hits.

From March to October 2013, the number of available homes had increased roughly 67%, causing the Expected Market Time to rise from 39 days to 81 days. At their peak, mortgage rates surpassed 4.5% in September 2013 before retreating to 4.23% in October.

The Cause and Effect of Rising Rates

The fundamental trend of persistent rising rates from 3.34% at the start of 2013 to 4.5% in September paved the way to a shift in the market from an incredibly hot seller's market to a more balanced real estate market.

Buyer demand is closely correlated to interest rates, and downshifted due to rising interest rates.

With a bit less demand, overpriced listings sat on the market and accumulated over time, allowing for the inventory of available homes to rise. With a rising supply and muted demand, the overall speed of the market slowed.

The 2022 Real Estate Market?

No one has a crystal ball, and it's hard to tell for certain how this real estate market will behave for the rest of the year. What we do know is that interest rates will continue to rise to help combat inflation. Rising interest rates will slow buyer demand because it will dwindle a buyer's borrowing ability and overall affordability.

Fewer buyers will be in the marketplace as a result of rising interest rates. Hopefully, that allows inventory to continue to build. The problem is that many sellers are apprehensive to sell in this market - not because their house won't sell, but because they don't want to become buyers in this incredibly competitive seller's market.

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The Bottom Line: Interest rates will continue to rise in 2022, which will eventually balance this real estate market.

Advice to Sellers:

Pricing at or slightly above the last comparable pending or closed sale will expose the home to the largest buyer pool. The auction that follows will have buyers competing against each other to achieve success. This results in sales prices above their asking prices.

Advice to Buyers:

There are more benefits to participating in this competitive real estate market versus waiting. While interest rates are on the rise, they are still incredibly attractive and will allow you to save a ton of money per month on your overall mortgage expenses. You'll have to be patient, but securing a home and locking in a great mortgage rate are worth the frustrations.