Are Rising Mortgage Rates Actually Making the Real Estate Market Even Hotter?

Are Rising Mortgage Rates Actually Making the Real Estate Market Even Hotter?

Early this year, we provided agents three benchmarks to consider when answering client questions about the explosive rise of housing prices over the past two years.

The first housing market factor we encouraged agents to track were mortgage rates. Low mortgage rates in the early days of the COVID-19 pandemic helped supercharge real estate sales in 2020 and 2021. If the 30-year fixed mortgage rate rose as expected and approached its pre-pandemic level of around 4%, it might indicate a taper in home prices.

Mortgage rates have risen, but housing prices have not fallen. Why? What is the present state of the housing market and mortgage rates? Is there reason to believe that rising mortgage rates are actually causing even more home buyers to get into the market? 

We have an update for agents about the state of mortgage rates and the housing market, and believe that this information will help you feel comfortable explaining to buyers and sellers about how rising mortgage rates are likely to affect the real estate market in the short- and long-run.

The State of Mortgage Rates and the Housing Market

Over the past 14 months, mortgage rates have risen steadily. Just consider that in January 2021, a 30-year fixed mortgage rate was at 2.65%; in early March 2022, the fixed rate is 3.75%, and has topped 4% multiple times.

Taken alone, this mortgage rates trend should predict a cooling housing market. Higher mortgage rates mean that people have to pay more over the course of a loan and should, theoretically, dissuade them from paying a hefty sticker price for a home.

Still, in spite of rising mortgage rates, the cost of homes has continued to rise in early stages of 2022. Why?

To start, remember the two other trends we suggested you monitor at the beginning of the year:

  1. Overall inflation has not fallen, and the highest consumer prices in decades are being felt across industries, including the price of homes.
  2. New home construction has increased in recent months, but the supply of new homes is still far from reaching pre-pandemic levels.

If inflation persists and housing inventory remains low, rising mortgage rates may not be enough to slow the increase in home costs.

But so far in 2022, the hot real estate market may not be occurring in spite of rising mortgage rates. Instead, rising mortgage rates are possibly motivating even more consumers to apply for mortgages and buy homes at or above their listing price.

How Can Higher Mortgage Rates Heat Up the Real Estate Market?

Why might rising mortgage rates be driving buyers into the market? Because rising mortgage rates today may indicate sky-high mortgage rates tomorrow.

The Federal Reserve has indicated since the beginning of the year that it plans to raise interest rates this year in response to persistent inflation. Rate hikes may start as soon as the early spring, and if the Fed raises the cost of borrowing, mortgage rates may rise substantially, too.

For buyers, then, the prospect of even higher mortgage rates may be a motivator to jump into the market. If mortgage rates are rising now, before rate hikes start, how fast are they going to rise once central banking policy actually changes?

It’s no wonder that buyers want to buy a home before the Fed raises rates. As an agent, you should remind would-be buyers that now may be the last time in the foreseeable future to capitalize on lower mortgage rates.

Also, homeowners may see rising mortgage rates as an indication that selling conditions are likely to be better now than in a year. After all, Fannie Mae is predicting that rapidly rising mortgage rates and a larger inventory of homes will start to cool the price of homes later in 2022 and in 2023. When you talk to potential sellers, remind them that rising mortgage rates could be a sign that the booming market is coming to end, and that now may be the time to sell.

Having a handle on the ever-changing housing market requires the ability to identify market shifts and trends as they happen. Homesnap Pro empowers you with real-time, comprehensive, agent-only MLS data that allows you to track price history and local market trends as they’re unfolding so that you can act as a fully-informed, real-time agent.

Clients are going to continue to ask questions about the unprecedented housing market. Make sure you can give compelling, informed, and helpful answers about mortgage rates, home prices, and all other market information by using Homesnap Pro.

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