The past few years have been great for homebuyers from a mortgage rate perspective. But from a home price perspective, they've been downright awful.
Since the start of the pandemic, prospective buyers have had to grapple with record-low inventory. That, combined with attractive borrowing rates, created a surge in buyer demand that sent home values upward.
In February, the median existing home sale price was $357,300, according to the National Association of Realtors. That marks a 15% increase from one year prior. It also represents 120 consecutive months of annual gains, which is the longest-running streak on record.
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But while everyday buyers and real estate investors alike have had to grapple with extraordinarily high home prices in recent months, things could change in the course of 2022 for one big reason.
Could higher borrowing costs drive buyers away?
The basics of supply and demand tell us that whenever a given commodity is in short supply, its price is likely to rise. That's precisely what's been happening in the housing market since mid-2020.
In February, the inventory of existing unsold homes ticked upward slightly from January to a 1.7-month supply. But for context, it takes a good four- to six-month supply of available homes to create a more equal housing market that doesn't notably favor buyers over sellers or vice versa. And clearly, it will take a massive influx of homes hitting the market to reach that threshold.
That's unlikely to happen this year. Sellers are still dealing with pandemic-related and economic uncertainty resulting from record levels of inflation. And while we might see inventory pick up to some degree, it's unlikely that we'll go from a 1.7-month supply of available homes to a four-month supply in a matter of months.
What may happen, though, is that higher mortgage rates start driving buyers away, creating a scenario where there's less demand for the limited homes that are available.
Right now, the average 30-year mortgage rate is at almost 4.5%. That's not a particularly high rate in the grand scheme of mortgages. But compared to the rates we saw for all of 2021, it reads high. And there's reason to believe mortgage rates will continue to climb as the year progresses.
For one thing, rates were so low for so many consecutive months that they were apt to rise at some point. But also, the Federal Reserve's planned rate hikes will probably have an impact on consumer borrowing rates, even if an indirect one. Since the Fed anticipates multiple rate hikes this year, we should expect mortgage rates to rise steadily.
That's a bad thing for those looking for savings in the course of financing a home. But it may also, in turn, drive home prices downward, making them more affordable for investors and everyday buyers alike.
Should sellers be worried?
Rising mortgage rates might actually, in a roundabout fashion, be a boon to buyers who can't swing today's high home prices. And there's a very good chance home prices will start to come down later in the year.
But that doesn't mean those on the selling side ought to panic. Home prices are so inflated right now that even if they were to drop notably, sellers are still in a great position to profit. And as mentioned, right now, inventory is still extremely limited, so sellers who list their properties sooner rather than later might still manage to command top dollar for them.
Ultimately, any home price changes that hit the residential housing market this year will likely be gradual. That means buyers will need to exercise patience to reap savings, while sellers should time their listings strategically to eke out the most profit.
