It's hardly a secret that mortgage rates have been on a steady ascent since the start of the year. And over the past month, they've risen sharply.
For context, the average 30-year mortgage rate sat at well under 4% for all of 2021. In the past 3 1/2 months, it's gone from sub 4% to over 5%. And there's reason to believe mortgage rates will keep rising this year.
The Federal Reserve has plans to raise its federal funds rate several times in 2022. While the Fed isn't tasked with setting mortgage rates (or any consumer borrowing rates, for that matter), its actions tend to influence them.
So far, buyer pullback has only been moderate in the wake of rising mortgage rates. For the week ending April 8, mortgage applications only decreased 1.3%, compared to the week prior, according to the Mortgage Bankers Association (MBA).
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Rising rates, however, are expected to result in substantially lower mortgage volume this year. Total originations for 2022 are now estimated at $2.58 trillion, down from about $4 trillion in 2021, reports the MBA.
Because rising mortgage rates are apt to lead to a decrease in buyer demand, some property owners may be concerned about a brewing housing-market crash. But that's unlikely to happen for one big reason.
Low inventory could prevent a drastic drop in property values
For home values to start plummeting, buyer demand has to drop off in a very meaningful way. Because there's such limited inventory available today, however, listed homes are unlikely to sit unsold for months on end. While we can and should expect a modest decline in home prices due to rising mortgage rates and associated buyer pullback, we're not necessarily looking at a drastic decline.
In March, the national inventory of active listings was down 18.9% from the previous year and down 62.3%, compared to 2020, according to Realtor.com. To give that some context, for every five available homes on the market in March of 2020, there were only two available in March of 2022.
Now let's think back to the big housing market crash of 2008. At the time, the housing market was oversaturated with homes, due to an uptick in both new construction and foreclosed-upon properties.
Today, we don't have that same excess level of inventory. Sellers have been skittish about listing homes since the start of the pandemic, and residential construction has slowed since the boom leading up to the 2008 crisis. So home prices should largely hold their values and decline only modestly and gradually, for that reason alone.
This isn't to say that sellers will get away with commanding the same sky-high prices they can get today in six months' time. But potential sellers and real estate investors shouldn't lose sleep over an impending housing-market crash. If anything, we're more likely looking at a slow and steady dip in prices that was apt to occur at some point anyway, regardless of rapidly rising mortgage rates.
