Home buyers this spring are facing a double whammy of rising home prices and mortgage rates. The 30-year fixed-rate mortgage rose to 4.72% this week, from 3.13% when compared to a year ago, Freddie Mac reports.

Over the last three months, mortgage rates have risen by 1.5 percentage points, the fastest three-month rise since May 1994. Also, during the first two months of 2022, home prices have climbed by more than 15% compared to a year ago, Nadia Evangelou, senior economist and director of forecasting at the National Association of REALTORS®, writes on the association’s blog.

But housing demand remains high, Evangelou says. A severe housing shortage due to underbuilding has occurred over the last decade. “Housing demand will remain strong due to favorable demographics and shifts in buyers’ preferences as teleworking remains in place,” Evangelou says.

As such, home prices are expected to rise 5.1% in 2022, according to NAR’s projections.

Buyers are weathering the higher mortgage rates for now. Mortgage rates still remain low by historical standards. A more typical historical average is 8%, according to NAR.

Freddie Mac reports the following national averages with mortgage rates for the week ending April 7:

• 30-year fixed-rate mortgages: averaged 4.72%, with an average 0.8 point, increasing from last week’s 4.67% average. A year ago, 30-year rates averaged 3.13%.
• 15-year fixed-rate mortgages: averaged 3.91%, with an average 0.8 point, increasing from last week’s 3.83% average. A year ago, 15-year rates averaged 2.42%.
• 5-year hybrid adjustable-rate mortgages: averaged 3.56%, with an average 0.3 point, rising from last week’s 3.50% average. Last year at this time, 5-year ARMs averaged 2.92%.

Freddie Mac reports points along with average commitment rates to better reflect the total upfront costs of obtaining a mortgage.

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Mortgage rates are quickly rising and home buyers are trying to snatch up low rates before further increases. Rate lock activity jumped in March as the average 30-year fixed-rate mortgage neared 5%, according to Black Knight’s March Originations Market Monitor.

“Despite seeing the fastest one-month rise in rates in nearly 13 years, we saw purchase lock volumes increase by 31% from February—likely as prospective buyers moved to lock in their loans before rates climbed any higher,” says Scott Happ, Black Knight secondary marketing technologies president.

The higher rates are chipping away at affordability. LendingTree offers the following example: A 30-year fixed-rate mortgage loan worth $300,000 would have cost a buyer about $1,283 a month with the average rate on Dec. 30, 2021, of 3.11%. But at a recent average rate of 4.67%, that monthly cost jumps to $1,551, an increase of $268 a month, $3,216 a year, and $96,480 over the lifeof the loan.

By the end of March, the 30-year fixed-rate mortgage rose 70 basis points to 4.79%, the highest level in more than three years, according to the Optimal Blue Mortgage Market’s index and its daily rate tracker.

As rates rose, the average loan increased by more than 23% to slightly under $361,000 in March compared to February, according to data from CoreLogic.

While rate locks are most commonly for 30 days, buyers can lock rates for 45 days or more. But buyers often must pay for a rate lock and will pay more for a longer hold.

Some buyers also are looking at buying down their interest rate by paying points to get a more attractive rate. Lenders may offer an option to pay a lump sum up front to lower the interest rate over the life of a loan. One discount point, in general, costs 1% of the total mortgage and could lower the interest rate by about 0.25%. Purchasing points could save tens of thousands or even hundreds of thousands of dollars over the life of a loan, lenders say, for buyers nervous about rising rates.

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Inflation is at a 40-year high, and the average consumer is spending $500 more a month on living expenses than a year ago. As such, home buyers may need to lower their budgets to keep pace.

House hunters would be smart to search for a home that is about $40,000 cheaper than they would have a year ago as a result of the rising costs, Gay Cororaton, research economist at the National Association of REALTORS®, writes on the association’s blog.

“The increased cost of spending on other items impacts the ability of the average consumer to have enough leftover income to purchase a home,” Cororaton writes.

Rising inflation, higher mortgage rates, and a tighter supply of housing available for sale are expected to soften housing demand this year. Lawrence Yun, NAR’s chief economist, has predicted home sales to decrease by 10% in 2022. Home prices, however, are expected to continue to increase about 5% due to the low inventory of homes for sale.

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The 30-year fixed-rate mortgage jumped to a 5% average this week, the first time it’s been that high since 2011. Since the beginning of the year, mortgage rates have jumped by 1.8 percentage points and added about $400 to the average monthly mortgage payment for a median-priced home, Nadia Evangelou, senior economist and director of forecasting at the National Association of REALTORS®, writes for the association’s blog.

Also, with inflation at a 40-year high, home buyers are finding they may need to adjust their budget to buy this spring. “As Americans contend with historically high inflation, the combination of rising mortgage rates, elevated home prices, and tight inventory are making the pursuit of homeownership the most expensive in a generation,” writes Sam Khater, Freddie Mac’s chief economist.

NAR predicts that rising borrowing costs will price out about 16 million households from the housing market this year. NAR has forecast home sales activity to drop about 10% in 2022.

Freddie Mac reports the following national averages with mortgage rates for the week ending April 14:

• 30-year fixed-rate mortgages: averaged 5%, with an average 0.8 point, rising from last week’s 4.72% average. A year ago, 30-year rates averaged 3.04%.
• 15-year fixed-rate mortgages: averaged 4.17%, with an average 0.9 point, rising from last week’s 3.91% average. A year ago, 15-year rates averaged 2.35%.
• 5-year hybrid adjustable-rate mortgages: averaged 3.69%, with an average 0.3 point, increasing from last week’s 3.56% average. A year ago, 5-year ARMs averaged 2.80%.

Freddie Mac reports average points along with commitment rates to better reflect the total upfront cost of obtaining the mortgage.

©National Association of REALTORS®
Reprinted with permission

The past two years have been quite exceptional for real estate. Home sales boomed. Home prices rose at the fastest rate in modern times. However, such a strong housing market created growing pains. Inventory shrank to its lowest count ever. Even through the recent winter months, the inventory that has made it onto the market has typically attracted multiple bidders—and, increasingly, investors offering cash. Twenty-two percent of recent transactions were investor purchases, up from 15% a year ago, and 27% of transactions were cash-only deals, up from 19% a year ago. That’s putting a strain on first-time buyers. Moreover, mortgage rates are notably higher as the Federal Reserve moves from a quantitative easing monetary policy, quickly buying up mortgages, to what is in essence a quantitative squeezing that does the opposite. With all this in mind, what’s ahead?

Let’s begin with the jobs picture. Although the unemployment rate is back to normal at 4%, the economy is still short by nearly 3 million jobs compared to before the pandemic. But that hasn’t held back housing sales. Existing-home sales reached 6.12 million in 2021, the best since 2006. The median home price reached an all-time high of $347,100, a one-year gain of 16.9%.

A few states actually have more jobs now than before the COVID-19 days. They are Utah, Idaho, Texas, Arizona, Georgia, and Montana in order of performance. Those are also the states experiencing extra strong real estate activity, both in residential and commercial markets. Jobs are important.

What now, given the diminishing pandemic— fingers crossed—and rising mortgage rates? Office workers will need to get back to the office. Maybe the new work model will be some form of hybrid, with a few days each week spent in the office. This still means locational choices do not have to be inherently dependent on big-city downtowns. It’s fine to live farther from the city, given less time spent on the commute. Higher mortgage rates, though, will lock out some would-be buyers. In very high-cost areas, the increase means about $500 more in monthly mortgage payments for the typical borrower. Consequently, home sales will come down 2% to 4% in 2022. If inflation remains stubbornly high and the Fed is forced to be even more aggressive, then home sales could fall by as much as 10%.

Prices will keep rising, though, since getting to a balanced market will take time. The turnaround may occur by the middle of the year. Expect calmer home price gains of 3% to 6% per year in 2022 and 2023.

Housing Shortage Worsens

Months’ supply—the number of months it would take for the current inventory of homes on the market to sell given the current sales pace—sits at just 1.6 months, down slightly from the 1.7-month figure recorded in December 2021.

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The 30-year fixed-rate mortgage averaged 5.11% this week, continuing its rapid rise, Freddie Mac reports. The higher borrowing costs are forcing home buyers to expand their budgets.

With higher rates and home prices, house hunters need to earn about $25,000 extra if they want to buy the typical home now compared to a year earlier, Nadia Evangelou, senior economist and director of forecasting at the National Association of REALTORS®, writes for the association’s blog. Existing-home sales are dropping as a result.

Rising Treasury yields are putting pressure on mortgage rates, says Sam Khater, Freddie Mac’s chief economist. “While springtime is typically the busiest homebuying season, the upswing in rates has caused some volatility in demand,” Khater says. “It continues to be a seller’s market, but buyers who remain interested in purchasing a home may find that competition has moderately softened.”

Freddie Mac reports the following national averages with mortgage rates for the week ending April 21:

• 30-year fixed-rate mortgages: averaged 5.11%, with an average 0.8 points, rising from last week’s 5%. Last year at this time, 30-year rates averaged 2.97%.
• 15-year fixed-rate mortgages: averaged 4.38%, with an average 0.8 points, increasing from last week’s 4.17% average. A year ago, 15-year rates averaged 2.29%.
• 5-year hybrid adjustable-rate mortgages: averaged 3.75%, with an average 0.3 points, increasing from last week’s 3.69% average. A year ago, 5-year ARMs averaged 2.83%.

Freddie Mac reports commitment rates along with average points to better reflect the total upfront cost of obtaining the mortgage.

©National Association of REALTORS®
Reprinted with permission