After months of anticipation, the Federal Reserve last week raised interest rates. The move was not a surprise – persistently high inflation and a strong labor market have monetary policymakers anticipating six rate increases over the course of 2022.
Amid a strange, hard-to-predict economy, rising interest rates add yet another unique variable. And compared to other industries, real estate stands to be strongly affected by rising interest rates.
Put simply, rising interest rates make it more expensive to buy a home. Rising interest rates mean rising mortgage rates, and rising mortgage rates mean that buyers have to shell out more to pay off their mortgage every month.
How will rising interest rates affect the housing market? What outcomes should agents anticipate when advising leads and clients about rising rates in 2022?
- Home prices may taper, fall, or continue to rise
- Millennial home buyers could struggle or power the market
- Some buyers may be incentivized to enter the market
1. Home Prices Could Fall – Or Not
It’s been the biggest point of discussion in the housing market for nearly two years, and rising interest rates will only fan the conversational flames: Are home prices going to stop rising?
Traditionally, rising interest and mortgage rates tamped down home prices, as competition for homes decreased because of higher borrowing costs. Some experts think that will be the case in 2022, but others aren’t sold.
- Inflation is still at its highest point in decades
- Home inventory is still at an unprecedented low
If general consumer prices continue to rise, home prices are unlikely to fall. And without many homes on the market, people may be willing to buy a home at its listing price, even as mortgage rates increase.
2. Millennial Home Buyers Are the X Factor
Research indicates that a median first-time home buyer is in his or her early thirties. Millennials, who make up a plurality of the American population, are the generation that currently occupies this cohort. As interest rates rise, the home buying behavior of millennials will indicate the broader health of the housing market.
On one hand, many millennials may not be able to enter the housing market as interest rates rise. Millennials already hold less wealth relative to other generations, since they came of age during the Great Recession and are disproportionately burdened by student debt.
On the other hand, one result of the 2008 housing crash was the underbuilding of new homes. So, the number of millennials who make a good salary and are at the age to buy a home may not meet the supply of available properties. Despite higher interest rates, these millennials may power a housing market that remains robust, at least until the supply of homes meets or exceeds their demand.
3. Rising Interest Rates Could Cause Some Buyers to Enter the Market
Rising interest rates mean rising mortgage rates. Is it possible that rising mortgage rates are, for now, actually heating up the real estate market?
The answer is maybe. Remember that last week’s interest rate hike was the first of six scheduled for this year. Mortgage rates are currently rising but still may be at their lowest point for the foreseeable future.
Home buyers are not unreasonable to think that buying conditions are better now than they will be in a year. If some home buyers determine that rising interest rates will make the market even more challenging in the future, they may act to buy now. Buyers deciding to enter the market while they still can may maintain or even raise the price of homes and the negotiating leverage of home sellers.