Interest Rates & Real Estate in 2022

The most recent inflation report for December was predictably alarming and has the Federal Reserve feeling hawkish. U.S. inflation hit 7% to mark its fastest increase since 1982. Consumer prices also soared over 6% year-over-year for the third consecutive month.

(All of that is of course if you believe the official figures… personally I think real inflation in the cost of living is WAY higher!)

Realistically, the Fed has no other choice but to throw the kitchen sink at the economy to reign it in.

With plans in motion to rapidly taper its bond purchase program, we could see the central bank announce rate hikes as soon as this week with its policy meeting.

With imminently rising interest rates, the real estate market is sure to be affected in 2022.

Although mortgage rates fluctuated throughout 2021, they were and still are around historically low levels. The average 30-year mortgage rate ended 2021 at roughly 3.05%.

Yet consider this…

…2021 started with an average 2.65% rate, the lowest on record. So big picture, we remain at historically low levels.

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Rates this low have led to a scorching hot real estate market of the likes we’ve never seen before. 

2020 saw home sales increase significantly and surpass 2007 levels, while 2021 saw the housing market’s most vigorous yearly growth in single-family home prices and rentals. So much so that according to reports by the Federal Housing Finance Agency, housing prices skyrocketed by 20%.

Moreover, we saw historically low foreclosure rates and the highest number of home sales in 15 years.

This was often talked about by pundits’ in the real estate mortgage note investing world in 2020/21.

We also saw historically low inventory in affordable housing, with unprecedented bidding wars occurring.

The total number of properties available for purchase decreased 19% in 2021 for houses under $200,000, while homes over $600,000 saw a 40% increase.

As the Fed scurries to end its pandemic-era monetary policy, inflation likely won’t peak until mid-year.

Coupled with mortgage rates that will rise, let’s see how the climate may or may not impact real estate in 2022.

Why it Will 

The Fed is planning four rate hikes in 2022. As a result, we could see a rush of buyers in the early half of the year make a last-ditch effort to take advantage of interest rates that remain historically low. 

“The Fed’s tapering means that less mortgage bonds and treasury debt will be purchased. As a result, mortgage rates will go up,” said Edward Mermelstein, founder of boutique advisory firm One and Only Holdings. “As mortgage rates go up, homes become more expensive to carry if you are financing the purchase.”

“Currently, mortgage rates are between 2.5 percent to 3 percent, so an increase in 0.25 percent would increase monthly expenses by 20 percent, which is significant. Therefore, it is always best to buy now, instead of six months from now,” he continued.

If anything, we probably won’t see any effects on the housing market until mid-year. So current conditions of scarce inventory and soaring prices could persist near term. 

Once we start to get into one or two rate hikes and begin seeing the impact, higher rates could potentially increase demand for more affordable homes, buck the trend of soaring housing costs, and potentially slow down the real estate market in 2022 .

This is pretty good news for our own Pathway to Homeownership Program, and our Private Lending Program as investors seek out a more diverse range of safe, passive income streams

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Why it Won’t 

On the surface, rising rates could lower housing prices and slow down the market. But it likely will not do too much to improve inventory. 

What’s more, there is one reason why it potentially will not change anything in the big picture and cause red-hot housing prices to dip. 

Even a half a point rate increase will impact affordability for buyers, especially on the lower end of the market, with housing prices still historically high.  

 The combo of higher rates and rising real estate prices is not ideal and creates a conundrum for buyers. Potential buyers will have to weigh the option of taking advantage of low rates now and sky-high housing prices, or try and wait it out and hope housing prices cool. 

Judging by this recent quote from Melissa Cohn, regional vice president and executive mortgage banker for William Raveis Mortgage, none of it may even matter. 

“Higher rates will hurt just that much more as real estate prices have climbed by 20 percent or more in the past year… The combination will be hard on the real estate market. People will still be able to buy—but they will be able to afford less space.”

Wrapping Up

On the one hand, as the Fed tapers bond purchases and hikes rates to fight inflation, mortgage rates will increase. 

On the other hand, the pandemic’s trajectory remains uncertain, and any new variant or wave could impact policy. While it’s unlikely the Fed will divert from its plan, nothing can be ruled out. We’ve seen unstable economic recoveries in different countries and must consider all scenarios. 

Having said that, even if/when the Fed hikes rates, it’s doubtful we’ll see any dramatic shifts in 2022’s real estate market.

Between the next six months to a year, we could see rates vary from 0.25% to 0.50%. It’s hard to foresee moves this small have a dramatic impact on real estate in the short term.  

Source: CPI Capital Real Estate Investment News

However, one thing to consider is how this could signal a long-term shift in Fed policies and mortgage rates.

While any interest rate fluctuations now may not cause a significant real estate shift tomorrow, it could be the start of progressively rising rates into 2023, 2024, and beyond. 

Many analysts and experts believe 2022 could have similar trends as 2021– rising prices, low inventory, and quick turnaround. The hope, though, for buyers is that while inventory will likely remain scarce, price appreciation will be slower than it has been. 

It’s hard to foresee any changes to the market until the second half of the year. If any at all.

In all likelihood, the market will essentially be the same, just with higher rates. Housing prices will still likely hover around overinflated levels with low inventory. This combo with rising rates later in is not ideal for anyone. 

The housing market is not a buyer’s market at the moment. However, for those aiming to take advantage of low mortgage rates, despite high prices, now might be the only time.

It is highly doubtful we ever again see rates like this at least not in my lifetime.