Rising Mortgage Rates Are Finally Leading to Lower Home Prices

Talk about good news.

Last year, home prices soared on a national level, making it difficult for budget-conscious buyers to break into the real estate market. This year, home prices started off high again -- and they're still high right now. But one way this year's housing market has differed is that borrowers haven't been graced with the low mortgage rates buyers got to enjoy in 2021.

Mortgage rates have risen steadily since the start of the year, and to a pretty extreme degree. In 2021, the average 30-year mortgage stayed well below 4%. At this point, it's hovering around 5%. And there's reason to believe mortgage rates will continue to rise in 2022 as the Federal Reserve moves forward with its planned rate hikes.

But while rising mortgage rates might seem like a glaringly bad thing for buyers, they might serve the important purpose of dragging home prices down. In fact, new data indicates that may already be happening to some degree.

Finally, some much-needed housing market relief

Home prices are still way up across the board. In fact, the average mortgage borrower is now paying about 38% more than they would have for the same home one year ago, according to Realtor.com.

But home prices may slowly but surely be on their way down. During the four-week period ending April 3, about 12% of homes up for sale wound up lowering their asking prices, reports Redfin. And the rate of home sellers reducing their asking prices is growing faster each month compared to last year.

Of course, 12% hardly represents the majority of the housing market. The point, however, is that as mortgage rates continue to rise, buyers are apt to start pulling out of the market due to affordability issues. If enough buyers go that route and demand starts to wane to a notable degree, sellers may be left with no choice but to lower their prices more broadly. And that could lead to a gradual but notable reversal on the home affordability front.

Of course, housing inventory will also play a role in home price declines. Right now, sellers can get away with higher prices because there's very little inventory on the market. Once more homes get listed, sellers may need to be more conservative with their asking prices to stay competitive.

Will home affordability increase this year?

Right now, high mortgage rates and inflated home prices are forcing home buyers to put plans on hold. As 2022 progresses, mortgage rates could continue to rise. But home prices could also start to decline.

Will that lead to an uptick in affordability, or will both factors effectively cancel each other out? It's hard to say.

Mortgage rates have risen at a pretty rapid pace, and if that continues, buyers might ultimately lose out, even if home prices start dropping. But if mortgage rates climb at a more moderate pace for the remainder of the year and home prices fall steadily, buyers could end up with more options than they have today.