Home Prices Hit a Record High in March as Mortgage Rates Soared

Talk about a surprising trend.

Although home prices have been elevated since the latter part of 2020, between then and the start of 2022, buyers got to enjoy low mortgage rates. In fact, those low rates made it possible for buyers to move forward with offers even at a time when home prices were soaring.

This year, mortgage rates have risen sharply, and as of this writing, the average 30-year loan is at well over 5%. In fact, even the 20-year loan has surpassed the 5% mark on average. 

Now you'd think rising mortgage rates would cause buyers to pull out of the housing market in droves. But actually, that doesn't seem to be happening, as evidenced by the fact that home price gains managed to hold steady in March. 

Home prices are still very high

In March, home prices hit an all-time high as buyers continued to make offers. The median existing home price in March was $375,300, reports the National Association of Realtors. That represents a 15% increase from a year prior. It also marks more than a decade of consecutive year-over-year gains, which is the longest running streak since that data started getting tracked. 

Why are buyers still clamoring for homes?

We didn't see a strong buyer pullback in March, and that could boil down to fear. A big reason mortgage rates have been on the rise is that the Federal Reserve has plans to hike up its federal funds rate several times this year. As that happens, mortgage rates are apt to climb even more.

What may have happened in March is that buyers continued to be aggressive in the hopes of signing a mortgage before borrowing rates rose even more. But another big reason why home prices gained so much is that inventory is still at a low. While the supply of available homes increased in March compared to February, inventory was still down 9.5% from March 2021. 

Will buyer demand stay strong in 2022?

Although mortgage rates have been on the rise since the start of the year, they've risen more substantially over the past four to six weeks. If that trend continues, we could see a decline in buyer demand as 2022 moves along. And if buyer demand drops, home prices should start to follow suit.

More inventory could also hit the market this year, and that might also drive home prices downward. But to be clear, we shouldn't expect a drastic drop in home values. Or, to put it another way, buyers shouldn't fool themselves into thinking that homes will magically become affordable this year -- especially not with mortgage rates sitting at the levels they're at today. 

Of course, this makes you wonder -- should buyers consider paying for homes in cash now that borrowing is so costly? It's an option to think about for those who have the money, but it's a risky one. Homes are a fairly illiquid asset, and tying up hundreds of thousands of dollars in a property is a move that could backfire. 

On the other hand, in a market starved for inventory, cash offers give buyers who can make them a clear advantage. And those who are sitting on cash and want to save money on mortgage interest might consider buying a home outright if that possibility is on the table.