Rising mortgage rates are supposed to temper house prices. Could it be different this time around?

Getting More Expensive to Become Homeowner by the Minute

Rock-bottom interest rates are definitely past tense.  Mortgage rates have increased by more than one percentage point since the beginning of 2022 and it’s more than likely those rates will keep climbing.  Plus, home prices are at record highs and still rising.

Combine rising home prices and rising mortgage rates and you’ll notice that in February, prior to the Federal Reserve’s announcement in mid-March to raise rates throughout 2022, the median monthly payment on a new mortgage application jumped more than +8% in just one month to $1,653, according to the Mortgage Bankers Association (MBA).

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 New, Unpredictable Phase in Housing Market

Edward Seiler, associate vice president for housing economics with the MBA, said, “There are so many strange things going on right now.”

It’s been 40 years since interest rates, home price growth and inflation have all increased simultaneously.  This time around, however, there is a severe housing shortage to exacerbate the housing market even more.

Plus, with the relatively instant rise of remote working, homebuyers are shifting their priorities in terms of what they want to buy and where they want to buy.  Seiler said, “Nobody really knows what’s going to happen over the next year.”

Sam Khater, chief economist with Freddie Mac, agrees. “We’ve had episodes (of both rising rates and rising home prices) in the past – but not this intense for both.”

Mortgage Payments Rising in States Across the Country

The average monthly mortgage rate in February skyrocketed in one month to $1,653.  Check out the specifics of mortgage payments in these states during February:

  • Texas – $1,490
  • Idaho – $1,860
  • Arizona – $1,730
  • Florida – $1,600

Rents Skyrocketing

According to GOBankingRates, the median rent in 2021 soared +17.8%, a record high.  GOBankingRates commented that “expensive” and “prohibitive” do not adequately describe such a huge rent cost burst nor the crisis that millions of renters are facing as long-term leases expire and overpriced inventory diminishes.

More and more priced-out potential homebuyers are renting.  It’s more than likely that today’s impossibly high rent ceiling is nearly certain to be tomorrow’s floor.  Rents follow inflation and property taxes as they go up and up, even in economic downturns.

Jimmy Harris of We Buy Houses in West Georgia said, “I have owned rental properties for over 20 years and rental rates have never dropped.  Even when the real estate market crashed in 2008-2013, rent rates did not fall.”

Arpit Gupta, professor at N.Y.U.’s Stern School of Business, has warned that rising rents can make rental inflation even worse.  Why?  Because it pushes even more potential buyers out of the buyer market and into the rental market.  This feedback loop of driving up demand in the increasingly expensive rental market puts even more pressure on people who can afford to buy, even at higher interest rates, to push up home prices further and further.

Logic to Bidding High for Scarce Housing

Buying now before interest rates climb more and make it harder to buy means that interest rates won’t rise any more for that specific homebuyer.  According to Beth Abeita, a Redfin agent in Austin TX where home prices increased +40% and rent prices increased +40% in 2021, said, “You’re not going to pay even higher prices in three months.  What you think you’re overpaying for today will be a deal in a few months because everything is increasing so rapidly.”

Khater with Freddie Mac said, “Higher rates don’t solve any of that.  It might bring the market a little more in balance – modestly more in balance – but it doesn’t solve the fundamental issue…” of not having enough housing.

In other words, higher rates does not and will not create more supply.  Rising rates will only increase borrowing costs for homebuilders on top of labor shortages, lack of buildable land, supply chain shortages, etc.  And those increased borrowing costs, passed on to buyers, will only cause homebuilders to build fewer homes and lower supply even more.

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Thanks to The New York Times.







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