As many experts predicted, mortgage rates rose in 2022. However, not many experts predicted such a quick rise in rates to start the year. In fact, rates are off to their worst start since 2009, as treasury yields and inflation jar the real estate market. Mortgage rates rose for the third straight week and have reached the highest point in years. The last time we saw mortgage rates this high was March 2020, as the pandemic was just beginning. The average 30-year loan rate was 3.45%, which is up from 3.22% last week, according to Freddie Mac. Here is what to expect as mortgage rates soar to start 2022.
Expect More Mortgage Rates Increases
With the volatility in the Treasuries market, coupled with the highest inflation increase in nearly 40 years, mortgage rates followed suit. The climb in mortgage rates lead to an increase that topped out this week at just under 3.5%. This may seem high to some people who just got into real estate, but in fact, they are still lower than the 10-year average. With an increase in mortgage rates at the level we are seeing currently, expect the costs of borrowing to rise further, faster. With the Federal Reserve debating on when to completely stop asset purchases, when to raise rates, and when to start their balance sheet run-off, expect more rate volatility.
The Federal Reserve is stepping in to stomp out some of the fastest accelerating inflation since the early 80s. In fact, some of us might not have even been alive to see the last dramatic increase in inflation. Stomping out inflation is good on paper, but during the process, expect the super-easy monetary policy we have seen to change. In fact, consumer sentiment has came in under expectations as well for December.
Mortgage Rates Soar And Hurts Buyers
An increase so dramatic is sure to impact the real estate market sooner, rather than later. The increase will create a burden to homebuyers, especially first-time homebuyers. In fact, some buyers may even be priced out of buying their first home as costs of borrowing increases. The mortgage rates for 30-year fixed rates were at a record low just over a year ago. Looking back, many people were able to take advantage of those historically low rates, which partially influenced inflation.
When there is high demand due to low costs, eventually supply will be squeezed, and lead to price increases. This is exactly what we saw throughout 2021, and what we will continue to see in 2022. This trend will continue this year because the supply problem has not gone away, as well as rates still being favorable compared to recent history. In fact, mortgage rates above 3% are not very scary in the grand scheme of things.
What Increasing Mortgage Rates Mean
There has been a lot of confusion to start the year with the way rates have moved. Some experts are concluding that rates moved in anticipation of the future rate hikes. The move in rates has been drastic, and rates may continue to increase. In fact, rates may increase to about 3.8% in the first quarter, then remain steady throughout the year. This is what we saw last year in 2021, and is starting to look like how 2022 Q1 will play out.
According to Sam Khater, Freddie Mac’s Chief Economist, “The rise in mortgage rates so far this year has not yet affected purchase demand.” However, this does not look to be the long-term impact. In fact, we will not begin to see the buyer demand for January until the data is released in February. This will be the true test, especially given the fact the Federal Reserve will likely decide on when the rate increases will begin. Sam Khater continued, “But given the fast pace of home price growth, it will likely dampen demand in the near future.”
Rates and Inflation
We talked about this in a previous article, but inflation does still impact the real estate market. In fact, real estate is almost a hedge for inflation as getting a set rate allows you to save money for other price increases. Read more about this in our inflation and real estate article. According to Keith Gumbinger, vice president at HSH.com, “If inflation begins to cool, expect interest rates to level.” As we saw with the PPI that was released earlier this week, inflation does look to be slowing. However, if you look at the 7% CPI print, there is a little cause for concern as the Federal Reserve may be late.
At the current average rate monthly payment, the monthly payment on a $300,000 mortgage would be $1,339. That’s up from $1,209 at the record low of 2.65%, reached in January 2021.