Rising interest rates could rebalance the housing market

While rising interest rates can lead to further reductions in housing supply, they can also bring much-needed balance to the market, according to First American Financial Corp.

December 2021 from First American Financial First U.S. Real House Price Index (RHPI) Home prices rose 21.7% year-over-year in December, the highest annual growth rate since 2014. Arizona, Florida, South Carolina, Connecticut and Georgia recorded the largest year-over-year increase. Month over month, real house prices rose 1.9% from November 2021 to December 2021.

Mark Fleming, First American’s chief economist, said the record increase was due to rising mortgage rates and rapidly appreciating home prices. Additionally, the 30-year fixed-rate mortgage rose 0.4 percentage points while the adjusted house price index rose 21.4 percent, he said.

“Even though household income has increased by 5% since December 2020 and has boosted consumer purchasing power, this has not been enough to offset the impact of rising mortgage rates and rising nominal prices. about accessibility,” Fleming said in a statement. “In the near term, affordability is expected to decline further as mortgage rates are expected to continue to rise and the pace of house price appreciation outpaces household income gains. How buyers and sellers react to higher rates can help the housing market regain some balance.

Several economic dynamics dominated the market in the second half of 2021, including the pace at which homes are appreciating, rising mortgage rates and record low numbers of homes for sale. And while homeowners have historically high equity in their homes and may feel wealthier, many have also secured historically low fixed-rate mortgages, Fleming said.

“There is a financial ‘lock-in’ effect that increases as mortgage rates rise and the size of a mortgage increases,” Fleming said. “Rising mortgage rates increase the monthly cost of borrowing by the same amount a homeowner owes on their existing mortgage. The higher the prevailing market mortgage rate relative to the owner’s current mortgage rate, the stronger the foreclosure effect. Why move and go down?

And while unadjusted house prices are 44.5% higher than the peak of the 2006 housing boom, the report found that “real house prices adjusted for housing purchasing power” remain 33.2% lower. at this peak.

What does all this mean? The report found the housing market will adjust as some buyers feel ‘locked in’ to their homes, while first-time home buyers grapple with limited supply and declining affordability.

“But what goes up, eventually has to come down,” Fleming said. “Rising rates may be a headwind in the housing market in 2022, but as some buyers pull out of the market due to affordability and supply constraints and as new construction adds more supply, house prices will moderate, resulting in a more balanced housing market.”

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