Can housing prices and interest rates increase at the same time?

Buying a home in America is becoming more expensive. Mortgage rates, historically low for most of the pandemic, are rising faster than decades.

Put the two trends together, and the future monthly mortgage payment for homebuyers – combining principal and interest payments – is indeed withdrawal:

In February, according to the Mortgage Bankers Association, the average monthly payment on a new mortgage application in America jumped more than 8 percent in just one month. This surge points to a whole new and unpredictable phase in the housing market that has been staggering.

In normal times, raising mortgage rates should help cool home prices. But it is now possible that both measures will continue to emerge together, making buying a home more expensive.

“So many strange things are happening now,” said Edward Sailer, vice president of housing economics for the Mortgage Bankers Association.

It has been 40 years since rates have risen this way along with similar rising house prices and high inflation. This time, the United States is also experiencing severe housing shortages. And then there is a new and uncertain dynamic – a sudden increase in the number of jobs at home, which can change what home buyers want and where they live.

“No one really knows what will happen next year,” Mr Seiler said. This makes it difficult to predict when rates may act as a brake on price growth.

Among the subgroup of mortgages backed by Freddie Mac, the monthly payments that new buyers make have risen more sharply since the pandemic than ever in the past 25 years.

“It shows you the artifact of rising tariffs and rising house prices,” said Sam Hatter, chief economist at Freddie Mac. “We’ve had episodes of each in the past, but not as intense for both.”

At the start of the pandemic, falling mortgage rates made it possible to raise house prices – and offset them with monthly mortgage payments, which remained stable for most of 2020. But if both measures grow simultaneously, monthly payments could rise rapidly, as in Sun Belt and Mountain West states in particular.

Rates and house prices may well continue to rise together for a number of reasons related to today’s high inflation. Rents are now also rising. This means that the alternative to buying is also not particularly attractive. And in times of high inflation, buying a home – and fixing today’s monthly payment for the next 30 years – is a good way to protect yourself from rising rents. In the context of 8 percent annual inflation, a 4.5 percent mortgage rate is actually a decent deal.

For potential home buyers, “the alternative is both the rental option and the option where you put your money?” Said Arpit Gupta, a professor at Stern School of Business at New York University. In past periods of high inflation, real estate tended to be a better asset than other types of investments such as stocks (and better than leaving money in a checking or savings account).

Mr Gupta warns that rising rates could further exacerbate rental inflation because it is pushing more people out of the buyer market into the rental market, boosting demand there. In a kind of feedback cycle, these ever-increasing rental rates will continue to put pressure on people who can afford to buy instead, even at higher interest rates.

While mortgage rates have risen by half a point in the last four weeks, there is little evidence that the market is calming down. Last month, the share of homes for sale that accepted the offer in just one week reached a record, and prices on the list for the last week still setting new highs.

“I don’t see much concern from my buyers,” said Beth Abeta, a Redfin real estate agent in Austin, Texas, where housing prices rose by a staggering 30 percent in 2021. 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 suggested by Mr Gupta, and because lower stock prices mean some buyers will have less money for the first installment.

Ms. Abeita said it makes sense to take on all the bets on scarce housing before things get worse.

“Interest rates for you will no longer rise,” she said of those who provided housing. “In three months you will not pay even higher prices. What you think you are overpaying for today will be a deal in a few months, because everything is growing so fast. “

This touches on another reason that demand is probably not yet cooling: the expectation of higher rates could trigger an increase in buyers trying to stay ahead of them now.

Under these conditions, buyers are also still competing for historically limited offers. The inventory of homes for sale was at a record low: more homeowners are holding homes as investment investments for rent instead of selling them, and potential sellers are afraid they will not find their next home without entering the market. Higher rates are also likely to deter some sellers as they choose to stay in a house recently refinanced at lower rates rather than move into a new home at twice the interest rate.

Exacerbating all these problems, the United States has been building for many years, especially in expensive coastal subways, where housing is in high demand.

“Higher rates don’t solve any of this,” Mr Hatter said. “It may make the market a little more balanced – a little more balanced – but that doesn’t solve the fundamental problem.”

In other words, higher rates won’t create more supply. In any case, rising rates across the economy will lead to increased borrowing costs for home builders, in addition to all their other problems with the pandemic.

Leave a Comment