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Interesting Article in the New York Times from March 31, 2022
Can Home Prices and Interest Rates Soar at the Same Time?
Rising mortgage rates are supposed to cool house prices. But this time could be different.
It’s getting more expensive by the moment to buy a home in America. Mortgage interest rates, historically low during most of the pandemic, are rising faster than they have in decades.
And that’s on top of home prices that have soared across the country over the past two years.
Put the two trends together, and the prospective monthly mortgage payment for home buyers — combining principal and interest payments — is really taking off:
In February, according to the Mortgage Bankers Association, the median monthly payment on a new mortgage application in America jumped more than 8 percent in just one month. That spike points to an entirely new and unpredictable phase in what has been a jaw-dropping housing market.
In normal times, rising mortgage rates are supposed to help cool housing prices. But it’s possible for now that both measures will keep charging ahead together, making it increasingly expensive to buy a home.
“There are so many strange things going on right now,” said Edward Seiler, the associate vice president for housing economics at the Mortgage Bankers Association.
It has been 40 years since rates have risen like this alongside similar home price growth and high inflation. This time around, the United States also has a severe housing shortage. And then there’s a new and uncertain dynamic — the sudden rise of working from home, which has the potential to change what home buyers want and where they live.
“Nobody really knows what’s going to happen over the next year,” Mr. Seiler said. That makes it hard to predict when rates might start to act as a brake on rising prices.
“I don’t see a lot of concern from my buyers,” said Beth Abeita, a Redfin real estate agent in Austin, Texas, where home prices rose an astounding 30 percent in 2021. If anything, she said, she hears people worried about the stock market, not mortgage rates — both because they now believe housing will be a better investment, as Mr. Gupta suggested, and because lower stock prices mean some buyers will have less money for a down payment.
There’s a logic to going all-out in bidding for scarce housing right now before it gets worse, Ms. Abeita said.
“Interest rates are not going to rise any longer for you,” she said of those who have secured a house. “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.”
That touches on another reason that demand probably isn’t cooling yet: The expectation of higher rates to come may drive a surge in buyers trying to get ahead of them now.
In this environment, buyers are also still competing for historically tight supply. The inventory of homes for sale has been at record lows, with more owners holding onto homes as rental investments instead of selling them, and with potential sellers who are afraid they won’t find their next home not entering the market. Higher rates will probably deter some sellers, too, as they choose to stay put in a home recently refinanced at rock-bottom rates rather than move to a new home at an interest rate twice as high.
Exacerbating all of these challenges, there has been underbuilding in the U.S. for years, particularly in expensive coastal metros where housing is in high demand.
“Higher rates don’t solve any of that,” Mr. Khater said. “It might bring the market a little more in balance — modestly more in balance — but it doesn’t solve the fundamental issue.”
Higher rates, in other words, won’t create more supply. If anything, rising rates across the economy will increase borrowing costs for homebuilders, too, on top of all their other pandemic problems.
