Can home prices and interest rates soar at the same time?
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 is on top of home prices that have soared across the country over the past two years.
Put the two trends together, and the impending monthly mortgage payment for homebuyers — 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% 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 is 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, 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 is a new and uncertain dynamic: the sudden rise of working from home, which has the potential to change what homebuyers want and where they live.
“Nobody really knows what’s going to happen over the next year,” Seiler said.
That makes it hard to predict when rates might start to act as a brake on rising prices.
Among a subset of mortgages backed by Freddie Mac, the monthly payment that new buyers are making has risen more steeply since the start of the pandemic than at any time in the past 25 years.
“That shows you the compounding artifact of both rising rates and rising home prices,” said Sam Khater, chief economist at Freddie Mac. “We’ve had episodes of each in the past — but not this intense for
both.”
Early in the pandemic, falling mortgage rates enabled rising home prices — and offset them in monthly mortgage payments that remained steady through much of 2020. But with both measures rising at the same time, monthly payments can escalate quickly, as they have in Sun Belt and Mountain West states in particular.
Rates and home prices could well continue rising
together for a number of reasons tied to high inflation. Rents are soaring now, too. That means the alternative to buying is not particularly appealing, either. And in a time of high inflation, buying a home — and locking in today’s monthly payment for the next 30 years — is a good way to shield yourself from rising rents.
“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% in 2021.
There is a logic to going all-out in bidding for scarce housing right now before it gets worse, 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 is not cooling yet: The expectation of higher rates to come may drive a surge in buyers trying to get ahead of them now.
Exacerbating all of these challenges, there has been underbuilding in the United States for years.
“Higher rates don’t solve any of that,” Khater said.
“It might bring the market a little more in balance — modestly more in balance — but it doesn’t solve the fundamental issue.”