2022 Will See Higher Mortgage Rates & Rising Real Estate Prices

Is it possible that mortgage rates can effectively be a non-factor in real estate?

It seems hard to imagine. Interest rates impact affordability, the lower the rate the easier to qualify for a given loan amount.

Rates also affect public sentiment. When mortgage costs fall, real estate becomes a lot more interesting. When rates rise, marginal borrowers fall out of the system, unable to qualify for financing. That means less demand and less pressure to increase prices.

We now see that mortgage rates are rising. Freddie Mac has been posting weekly rates since 1971 and at the end of September its headline for the weekly announcement read, Mortgage Rates Surpass Three Percent.

That’s hardly a steep rate. In July 1981 the typical mortgage was priced at 16.83%.

The national interest rate for the week of September 30th reached a lofty 3.05%, according to Freddie Mac. That’s up from 2.81% a year ago.

But is this a signal to panic? Not hardly.

In 2017, Dr. Lawrence Yun, chief economist with the National Association of Realtors (NAR), pointed out that “every 10 basis point rise in mortgage rates can shave off approximately 35,000 in home sales annually.” If we accept this estimate, it means that with rates up 24 basis points in a year, we should expect annual home sale volume to fall by roughly 84,000 transactions.

In August, according to NAR, the seasonally adjusted annual sale rate was 5.88 million units for August. That’s down from 5.97 million units for August 2021, a drop of 90,000 sales. Yun’s estimate, it appears, is very much on target.

Whose ox is being gored?

So, yes, higher rates lead to reduced sales, but not everyone is affected equally. If you’re a real estate broker and paid on the basis of completed transactions, then fewer sales mean less opportunity for commissions. If you’re a mortgage lender, settlement provider, appraiser, or property inspector, there are fewer chances to ply your trade or sell your services. Less volume is a real problem in these professions.

But for real estate investors and home sellers in general, the impact is different. According to NAR figures, if your goal is to market property, you’re fine.

• While there were fewer sales, there was also less available inventory. In August, buyers could pick from 1.29 million units, down 20,000 from August 2020.
• The typical home sold for $356,700 in August. That’s up 14.9% from a year earlier and the 114th straight month of year-over-year gains.
• You likely had a quick sale. In August, according to NAR, the typical listing sold in 17 days, down significantly from the 22 days it took to market a property a year ago.

Marginal Players

Despite the scary headlines, small rate increases have limited impact.

Buy a home for $356,700 with 5% down, and you need a $338,865 mortgage. With a 3.05% mortgage rate, the monthly cost for principal and interest over 30 years is $1,438. At 2.81%, the same loan costs $1,394.

Is a higher cost of $44 a month a big deal? It’s a difference of $528 a year and that’s real money in many households, enough to force borrowers with marginal debt-to-income ratios (DTIs) out of the market.

“NAR is predicting that by mid-2022 interest rates will hit 3.6%,” said Rick Sharga, Executive Vice President with RealtyTrac, “If that turns out to be the case, then we can expect about 276,500 fewer sales when compared with a 2.81% mortgage rate. That’s a lot of missing transactions, but it doesn’t necessarily mean home values will fall or that bidding wars will disappear. Given years of pent-up demand, it’s very possible that we will see both fewer sales and generally rising prices.”

NAR is not the only organization predicting that higher rates are ahead. The Mortgage Bankers Associations estimates that mortgage rates will hit 4% by late 2022 while Fannie Mae is at 3.4%.

Real Estate Values

NAR figures tell us that existing home prices have had year-over-year gains for 114 months — almost 10 years. That’s hugely impressive, however, if we look at month-to-month numbers, there’s a different picture. For instance, the median existing home price in July was $359,900 versus $356,700 in August, a drop of $3,200.

We can also see different outcomes if we look at selected local markets. As an example, the California Association of Realtors reports that in September, “after setting another record in August, California’s median home price declined to $808,890, down 2.3 percent from $827,940 in August. The September price was 13.5 percent higher than the $712,430 recorded last September.”

Fannie Mae, in mid-October, revised its home price projection downward. It expects 2021 annual house price appreciation to be 16.6%, up from 14.8%. For 2022, it projects a 7.4% price rise for the typical home.

Who among us objects to a 7% annual price increase? That’s a lot more than usual, it’s very likely to be more than the inflation rate, and — if the 7.4% prediction is right — it means about $2,200 a month in additional value for the typical residential property owner ($356,700 x 7.4% divided by 12).

Going to 7.4% general appreciation in 2022, if that happens, means less appreciation than this year, but it’s hardly a disappointment.