After years of stimulus injections and support from the Federal Reserve (Fed), the government takes off in 2022 – and market participants are preparing by demanding higher interest rates on their investments.
Mortgage interest rate bottomed out a year ago, in January 2021. Since then, rates have remained near all-time lows – until their recent jump in January 2022. This rise occurred in anticipation of the rise in the Fed of its benchmark rate, which is expected to occur in March 2022, according to the latest statement from the Federal Open Market Committee (FOMC).
This chart shows the average weekly interest rate over a 30 year period fixed rate mortgage (FRM) over the past 12 months. The FRM 30-year rate recently peaked at 3.56% in the last week of January 2022. This is almost a percentage point higher than the low reached in January 2021, when the FRM 30-year no averaged only 2.65%.
This jump in interest rates translates directly into decreases the money available to homebuyers and refinancers. Called buyer’s purchasing power, the average amount of money available to homebuyers has fallen 13.5% over the past year due to rising interest rates alone. In the absence of an increase in wages or savings, this drop in buyer purchasing power means homebuyers are entitled to 13.5% less mortgage money today than there were. one year old.
The impact on house prices and sales volume is imminent. With less mortgage money available, and without sacrificing their home search, buyers who depend on financing can pay less money for the same home. Those who don’t want to settle for less will simply delay their home buying plans until prices come down to suit their finances. Others will do well, offering less and less as interest rates continue to rise in the months ahead.
Without support from lower interest rates, additional stimulus or rising incomes, home prices in California are expected to decline in 2022. Home prices will still be controlled by the additional inventory that is expected to arrive in 2022 after the expiration in 2021 of the moratorium on foreclosures and the rise in forbearance exits.
Press Release: Q4 2021 Buyer Purchasing Power Turns Negative as Interest Rates Rise
Those already under a purchase agreement find today’s rate jump even more problematic. Unless they signed a lock rate with a lender, financed homebuyers find themselves unable to qualify to buy at today’s higher rates.
Competing in today’s tight inventory and high demand market, homebuyers are already being pushed to their limits. However, buyers unable to qualify for today’s higher rates due to an overrun debt to income (DTI) ratio limits may be able to “buy” or cut the interest rate – when they have extra cash.
In financing situations where there is no rate lock-in and buyers don’t have the ability to buy down, sellers will suddenly find themselves missing out on a homebuyer – unless they won’t be willing to compromise on price to save the deal. This leaves sellers with less cash after the sale, and the domino effect for future sales continues as rates rise and prices fall.
the long-term outlook because the purchasing power of buyers is a long period of descent as mortgage rates continue to rise with the economic recovery, and are expected to strengthen towards 2024. Rising rates will also put downward pressure on the wider economy, slowing growth and wage increases in all areas, leaving the economy more vulnerable to frequent recessions – but not of the monster variety experienced in 2008 when rates were falling.
Thus, sellers can expect downward pressure on house prices continue in the years to come. Without the support of a full employment recovery, house prices will remain weak in 2022-2023.