Rising Interest Rates Moderate Housing Demand

Unique housing market concerns buyers—but opportunity may be found in the rising rate environment

“What’s fascinating about the housing market right now is the forces of supply and demand seem to be out of whack,” says Benjamin Keys, real estate professor at Wharton in a recent article from the Wharton School of the University of Pennsylvania. 

“We are in a really unique housing market right now, where we have both interest rates rising and we have housing prices rising.”

Keys goes on to say that interest rates have not been consistently this high since 2011.  It’s a circumstance making a big impact.

For instance, a recent rate hike to nearly 5% cooled the mortgage application rate by 40% from over a year ago; perhaps potential buyers are concerned that hundreds of dollars per month will be added to their mortgage payments on an already expensive home. 

Indeed, in December 2020 the median price for a home in the U.S. was $309,200—a figure now escalated to $357,300. 

During this same time period, interest rates ticked up from 2.67% to 5.08% (as of the week of April 8), translating to a 55% increase in monthly payments for a buyer putting 10% down—more than $600 a month for a median priced home considering both increased price and growing interest rates.

Analysis of the effect of interest rates only shows a 2% rate hike translates to an extra $115 for every $100,000 borrowed on a 30-year note.

But is the rising rate environment all bad news for buyers?

Perhaps opportunity awaits, suggests Mark Fleming, chief economist at First American in an article at The Mortgage Reports. 

It is true that as rates rise, affordability is impacted—a factor that will take some buyers out of the market.

However, “What goes up, must eventually moderate,” Fleming says.  “Rising rates may be a housing market headwind in 2022, but as some buyers pull back….house prices will moderate, resulting in a more balanced housing market.”

This means fewer bidding wars.  Plus, the number of homes under construction is on the rise, with 1.899 million building permits pulled in January 2022, vs 1.883 million in January 2021.  This growth in inventory will also help moderate price increases.

So, what’s a thoughtful buyer to do? 

Since buying power has already been impacted by rising rates, consumers should not delay purchasing a home, but rather find incentive to move ahead sooner rather than later.

Post authored by Lora Bray.

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