The average home value in the United States increased by nearly 20% in 2021, and while there were several factors that fueled this gain, it's fair to say that mortgage rates hovering near all-time lows didn't hurt. However, with the Federal Reserve expected to raise rates in 2022, what would happen to the housing market if we saw mortgage rates increase? In this Fool Live clip, recorded on Dec. 16, Fool.com contributors Matt Frankel, Marc Rapport, and Jason Hall shared their thoughts.
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Marc Rapport: I'm just wondering if this is going to precipitate a decline in house prices in that single-home market. That, combined with rising prices or if it'll slow the soaring prices that we're seeing in most markets.
Jason Hall: This is one of those things where it's important to remember that this is where it gets really complex, because there's supply and demand where it's like the underlying economic thing that's supposed to drive markets, supply and demand. Then you have all of these other factors that come into play like what are people's motivations? What is the average family balance sheet looks like? How cash-rich are they? What are their incomes?
All of those things come into play and then you start thinking, and that's just like on the consumer side. We're not even talking about what's happening on the corporate side. That's why I think about this situation. I just want to talk about repercussions for a second and beyond housing where rising interest rates is certainly a chilling effect on housing prices and housing demand in a short period of time. The funny thing is like, right now, we could actually see demand and prices skyrocket as consumers try to move quickly before that interest rate rise actually does happen. Then the rates actually go up and then it cools things off for a period of time and then we start to see just the normal supply-demand impacts hit it again.
I think my biggest concern with those guys is at the end of the day, beyond housing, I think about like rising interest rates and the average person as being a net positive because it does push up savings rates. Right now, companies need low-cost capital to invest in infrastructure for the things that are problems like semiconductors, like building out better supply chain, like infrastructure spending. I'm mixed on what it all really means in terms of good, bad, or indifferent.
Matt Frankel: I will say that home prices rarely move backwards in general, but home prices, as far as I know, have never moved backwards in response to higher mortgage rates. Demand will cool off, you will see the market slow down dramatically, and you'll see a lot of sellers move to the sidelines and say, "Let's wait until demand picks up." But you will generally don't see prices move backwards unless there's some big economic forces at play that causes them to do so like you saw in 2007-2009, like with mass foreclosures, home prices could go down.
Hall: Well, those mass foreclosures happened because there was essentially, I don't know what the exact number was, how many millions of excess homes that people didn't actually need to live in. That was the real catalyst.
Frankel: It wasn't because fixed-rate mortgages were too high. It's because you were seeing these massive predatory loans with adjustable mortgage rates. They would go from 4% to 10% overnight. That's not what we're talking about here. We're talking about a gradual increase in mortgage rates. I think if mortgage rates spike to 5%, it wouldn't necessarily cause housing prices to decline. It might cause the market to slow down, but right now there's just such a supply and demand imbalance of the housing market. It might help supply catch up with demand, but that's really it.
Hall: I'm going to throw a quick chart up here. The purple line, this is the U.S. real interest rate -- in other words, what the average interest rate is paid going back to like 1960. Then the yellow one, and I'm just going to show just that one, that's the 30-year mortgage. I just want to point out that for most of the past 40 years, people would've been very happy to pay a 5% mortgage.
Rapport: My first mortgage was at almost 11% in 1987 and then it dropped below 11% at that point and we were lucky.
