Dysfunctional Housing Market From Higher Rates

The surge that is felt across the United States. As many buyers are looking to purchase a new home in 2022, they are met with a costly realization. The already dysfunctional housing market is even more uncertain just 6 weeks into the year. This is due to the surge in mortgage rates that looks relentless and on a path that doesn’t stop anytime soon. With lending costs increasing, affordability of already expensive real estate is tightening. However, one good thing from higher mortgage rates is that the demand should slow and house price increases should accelerate less, hopefully. Here is an overview on the dysfunctional housing market from a higher rates perspectives.

Mortgage Rates Lead The Way

With mortgage interest rates flirting with pre-pandemic levels, the housing market may be in for a sigh of relief. However, the most significant hurdle to overcome in the housing market is the record low inventory. In a season that we hope to have more homes listed, we will likely be struck with the realization of less. According to a mortgage rate index provided by Bankrate.com, the 30-year fixed mortgage rate grew a full percentage point since the Christmas holiday. This move is one that happens very infrequently, with the last move coming at the end of the Financial Crisis recovery in 2013.

For homeowners looking to buy their home in this high rate, high price market, there will be headwinds. In fact, for buyers putting down 20%, an increase from 3.2 to 4.2% results in a 10% increase in monthly payments. Because of this rate increase phenomenon, demand should hopefully slow throughout the end of the first quarter and into the second. With lower demand for houses, home price growth will likely slow and homebuyers should see cheaper homes reappear on the market.

Economic Data and The Fed

It is too early for mortgage rate increases to show up in economic data. However, they are likely to impact housing data in the coming months. Fortunately for many buyers, they are lucky enough to have a rate that they locked in a lower rate environment. This should motivate buyers to look aggressively for a home in this market as they have more favorable rates. However, these higher mortgage rates will truly start to take affect on the market come April. This is especially true as we will see how the Federal Reserve officially moves at their meeting in March. While these rate increases will impact demand, the bigger question of the dysfunctional housing market comes on the supply side.

Rate Shocks For Buyers And Sellers

What is different from this rate shock period than prior ones is just where the housing market stands. We are in an unusual time for the housing market, leading us to call it a dysfunctional housing market. With home equity at record levels, even people who have been in there home for as little as 12 months saw their wealth increase. And for those who owned their home far before the pandemic, they were able to refinance into a historically-low interest rate. This typically leads people to stay in their more expensive homes, rather than move. Because of that, move-up buyers become a thing of the past, as higher priced homes are less available than thought.

Not only are first-time homebuyers having trouble in a dysfunctional housing market, but move-up buyers are now too. These move-up buyers are facing a similar issue: supply. However, the thought of many of these homeowners also is impacted by mortgage rates. With mortgage rates now hovering near 4%, many homeowners that taking on this new rate from their 3% rate is expensive. For homeowners with a mortgage rate of 3% on a $300,000 home, trading up to a new home will cause affordability issues. These are the same affordability issues that we are seeing for first-time homebuyers.

Building In A Dysfunctional Housing Market

Finally, to put the icing on top of an already dysfunction housing market, homebuilders are having their own problems. With builders struggling to keep up with supply well before the pandemic, times are even more tough. Now, these builders must continue to build more homes at higher rates as well. And guess what? These extra costs for builders are almost always passed onto the homebuyers. We are currently living in what is considered a ‘shortage economy’. This means that there are shortages anywhere from grocery stores having empty shelves to not having building materials like windows and garage doors.

With a shortage in building supplies, homes are taking significantly longer to complete than before. This pushes back closing dates and increases prices for builders. While homes that have already started construction are likely to be finished, new home starts might not happen. Homes that are put under construction in 2022 may not even be move in ready until 2023. For a fast moving real estate market, this seem like an eternity. This is especially true as prices and rates are increasing over night. Also, high inflation and future economic growth predictions may cause problems for these future homeowners. In fact, the Federal Reserve is implementing a bank stress test this year that includes a 40% decrease in commercial real estate. When the largest supplier of money in the United States wants to be prepared for slower real estate, take the hint.

The Future Housing Market

To wrap this up, a higher mortgage rate environment means less supply and demand. Most people talk about the impact on demand, but supply is often overlooked. How the market shifts in the coming months will shape the housing market for the coming years. For those who have been waiting to buy for when supply ultimately ticks up, you are in for a ride. This is truly a dysfunctional housing market. History happens one day at a time, so how will you shape yours?

Source: Bloomberg