The housing market has taken off this year as home prices continue to surge amid high inflation and ongoing supply chain issues, but some experts say prices could soon level out as mortgage rates rise and demand drops.
With the Federal Reserve gearing up to reduce its portfolio of roughly $5 trillion in Treasury and mortgage-backed securities next month, long-term interest rates have shot higher, with the 10-year Treasury note closing in on 3%.
Fixed mortgage rates have spiked in recent months—to roughly 5%—in response to the Federal Reserve’s aggressive monetary tightening, which will have a “powerful gravitational pull” and put pressure on home sales, says Moody’s Analytics chief economist Mark Zandi.
“Higher [mortgage] rates will conflate with extraordinarily high house prices and make purchasing a home unaffordable for most Americans,” he adds, pointing out that today’s average monthly mortgage payment of $1,700 is nearly $500 more than last year and over double what it was a decade ago.
Home sales will come under pressure as existing homeowners will be less inclined to make a move and take on mortgage rates of 5% or more after experiencing record-low mortgages during the pandemic, Zandi says.
While housing prices are indeed “rising rapidly” in the near-term thanks to low inventories and historically high inflation, that will change as more buyers are priced out of the market and rising mortgage rates will slow price increases over the rest of 2022, predicts Bill Adams, chief economist for Comerica Bank.
Some experts also believe that mortgage rates are close to peaking: “People are overly bearish on housing—this isn’t 2007, and we believe mortgage rates are topping,” says Brett Ewing, chief market strategist for First Franklin Financial Services.
Home prices increased 19.8% in February year over year, the third-largest reading on record, according to new data from the S&P CoreLogic Case-Shiller national home price index on Monday.
“With home sales under pressure, the parabolic increase in house prices will soon peter out, and some price declines by mid-next year seem more than likely,” says Zandi. “With rates now moving quickly higher and affordability and demand being hammered, prices will come under pressure.”
The mortgage lending industry is slowing, with several major firms recently announcing layoffs amid rising rates. Several firms have cut jobs amid market turbulence: Wells Fargo last week confirmed that it had laid off an undisclosed number of home-lending employees, while mortgage lender Better.com also announced further layoffs after a round of firings in December and March.
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