Housing Market Entering Uncharted Waters

Posted by Cary W Porter on Tuesday, March 29th, 2022 at 10:18am

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Average mortgage rates are higher for all loan types today with the 30-year mortgage rate crossing above 5%.

  • The latest rate on a 30-year fixed-rate mortgage is 5.17%. ⇑
  • The latest rate on a 15-year fixed-rate mortgage is 4.197%. ⇑
  • The latest rate on a 5/1 ARM is 3.974%. ⇑
  • The latest rate on a 7/1 ARM is 4.135%. ⇑
  • The latest rate on a 10/1 ARM is 4.245%. 

Fed Chair Jerome Powell is done sitting idly on the sidelines as inflation burns away Americans’ purchasing power. The plan? Draw upon the central bank's decades-old inflation playbook by increasing rates until demand pulls back, and price growth slows.

This is already presenting a test for runaway inflation's poster child: the U.S. housing market.

CoreLogic, a real estate research company, which predicts the housing market is about to undergo some serious cooling. Between January 2022 and January 2023, CoreLogic expects U.S. home prices to rise just 3.5%. If CoreLogic is right, it would mean 2022 will go down as a below-average year for home price growth.

Why is CoreLogic's model relatively bearish? Unlike Zillow, it predicts a greater pullback on the demand side. The sting of soaring home price growth during the pandemic was lessened, to a degree, by record low mortgage rates. Now that rates are returning to pre-pandemic levels, buyers will feel the full punch of record prices. That could finally create some pushback on the part of home shoppers.

In Western Washington homebuyers should try to keep recent interest rate hikes in perspective. Locally, job growth will be crucial to maintaining a robust housing market, something he expects to continue.

 

While home mortgage interest rates have increased to the high 4% range, this would be considered fantastic on a historical basis, but it is an adjustment from the recent low rates that we are absorbing. With this change, the main focus for the future strength of housing will be job growth, which is the No. 1 indicator to a strong housing market. The Central Puget Sound region is currently seeing extremely strong job growth, which is likely to continue in the years ahead.

Here are a few predictions for what lies ahead.

Price appreciation will slow: The local market has seen tremendous price appreciation in the last two years. We anticipate that price appreciation will moderate slightly this year. After the big price boost in the spring, premium pricing may lower this summer. However, the year 2022 will end with positive price appreciation overall.

Luxury market stability: The luxury market has taken off over the last two years and will continue to be a strong segment of the local market due to solid job growth, the wealth effect and historically low interest rates. 

Inflation will have an effect: It’s also important to keep an eye on rising energy costs as well as supply chain and staffing issues, all of which could affect the housing industry this year.

Buyers’ debt to income ratios will be adjusted down: It’s common today for buyers to have debt to income ratios around 44% approved by lenders. With increasing prices on everything from milk to gas, to staple grocery items lenders will want to safeguard their investments and may lower this threshold to 40-42% (And that adjustment can mean a lot to your buyers)

Fewer bidding wars: As buyers are dealing with the combination on increasing rates, inflation and general uncertainty many are going to be more cautious about overpaying or perceiving that they are overpaying for a home.

Inventory and days on market will increase: “Inventory and mortgage rates will determine how far and how fast home prices will rise this year and beyond,” said Zillow senior economist Jeff Tucker. “We are seeing new listings returning to the market, slowly, as we enter the hottest selling season of the year, but this supply deficit is going to take a long time to fill.”

Inflation considerations: Inflation has already begun eroding the bottom lines of American households, with the Bureau of Labor Statistics noting rising costs for energy, housing and food as prime factors driving it to a four-decade high.

Of the six categories considered, survey participants expect energy prices to increase the most over the course of 2022, followed by house prices, residential rents, and food costs. Employee wages and stock prices were ranked fifth and sixth, respectively, rounding out the list.

One example comes from Hailey Miller of The Cascade Team. She recently had a buyer out looking for a home in $1,100,000 price range. After several (17 offers written for this client) Hailey managed to get them signed around on a home. Between March 1st when they last missed out on a home and March 15th when Hailey got them under contract their monthly payment on the loan increased by approximately $450 per month because of rising interest rates. That’s $450 per month for the life of the loan with rates unlikely to ever return to the 3’s again and greatly affects affordability and the ability of buyers to escalate prices on home offers.

 

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