Mortgage rates started out at 3.11% for the average 30-year,fixed at the beginning of the year, and they have just steadily climbed since then – up to 4.67%.
Rates are projected to continue rising, but at a more moderate pace, because the Fed has risen their rate and mortgage rates tend to follow.
So how does this affect home prices? Let’s take a look at the historical impact of rising rates on home prices when mortgage rates rose by more than a percentage point.
Looking back to October of 1993 (about 30 years), we can see an average of about 8% home price appreciation as mortgage rates are rising by more than a percentage point. So, rising rates have not had a negative impact on home prices.
So how do rising mortgage rates affect home sales?
Looking at the same data for the same period of time, we can see an average decrease of 11% in home sales as prices were rising. As rates rise, it can tend to reduce buyer activity – pricing some people out of the market.
It is important to note that first line (October 1993 to December 1994) where mortgage rates rose 2.38% to a final rate of 9.2%. We are NOT looking at a 2.5% increase in mortgage rates right now. That kind of increase is not in the projections. We are in a very, very different environment than we were back then. We are most likely looking at a 1.5% increase.
In rising mortgage rate environments, there is an overall 2% impact on home sales – a negligible impact – where 2005 & 2006 are the outliers leading up to the housing crisis.
Overall, rising mortgage rates don’t have a huge impact on home sales. Why? Because you have to consider the inventory component. Today, we are seeing drastically low inventory – lower than it was in January of 2021, which was a historical low. Home prices are projected to continue rising, because there just aren’t enough homes for sale. Supply and demand are what drives home price appreciation. So, when you see those headlines saying home sales are softening, it’s not because of rising mortgage rates. It’s because there aren’t enough homes to buy.
When we look at months inventory, historically we had between 4.5 and 5 months inventory on hand – a very, very different inventory level than what we have today.
Inflation is driving this increase in mortgage rates, and we can expect it to continue to rise, but it won’t be at as quite a rapid pace as what we’ve seen over the past few weeks.
Home price appreciation will slow, and mortgage rates will slow some of the frenzy. But, we’re not talking about depreciation. We’re talking about deceleration – appreciation at a more moderate rate.
We hope that all helps explain how the rising mortgage rate environment will affect the other factors in the market, so let’s move on to the forecasts for the spring housing market.
We are in a very, very busy market.
Here is the NAR (National Association of Realtors®) Buyer Traffic Map – strong activity overall.
Then, we see very, weak seller traffic overall. So, strong buyer demand combined with the lack of sellers keeps that upward pressure on prices.
However, we did see increased active listings in March.
Pending home sales have dropped, overall – not because there’s a lack of demand in the market, but because we can’t sell what we don’t have. Nonetheless, we seem to be in a healthy market.
We’re ahead in showings and activity, indicating, again, strong demand.
Price acceleration is also holding steady, indicating a very competitive market.
And we are still ahead of historical appreciation. Overall, these figures look to a strong spring market.
With all the uncertainty out there, let’s take a quick glance at 5 graphs that break down the most common concerns.
First, active listings as compared to new listings going back to August of 2021. The light blue bars represent active listings each month, and the dark blue bars represent new listings that are taken during the month. Active listings outpace new listings until March, where new listings actually outpace the active listings. This means as soon as something comes on the market, it sells.
Second, the single-family housing units completed tells the story of why it’s so hard to find a home right now – why prices have risen the way they’ve risen. And the simple answer is that for 14 straight years, we’ve been below the 50-year average in new construction, due to the fallout of the housing crisis in 2008. Builders were hit extremely hard, and are building back their capacity – their ability to bring new builds to market. This has constricted supply.
Third, we look at home ownership as a hedge against inflation. When you’re in an inflationary economy, you want to be invested in hard assets that outperform inflation. The light blue represents the inflation rate, and the dark blue represents home price appreciation. Historically, home price appreciation has outperformed inflation (with the exception of the housing crisis).
Fourth, we look at the home price expectation survey – a survey of 100 economists, real estate professionals, and market investor professionals determining what is going to happen with home prices. $96,000 in potential growth in household wealth over the next five years based solely on increased home equity if you purchased an average priced home (about $360,000).
Finally, a look at home price appreciation. Among the seven experts, the average home price appreciation is 6.7%. Not one is forecasting prices to go down.