What to expect from the housing market now that the Fed has signaled rate hikes

Are you planning to buy a house in 2022? The good news is that conditions won’t quickly spin out of control like they did last year. The bad news is that supply remains tight and prices are still on the rise – and the likelihood of higher mortgage rates looms on the horizon.

Real estate professionals say this year’s real estate market won’t reach the peak it reached in 2021, and the pace of home sales this year will be much less frenetic. “As we go through the year, we will see slower sales activity,” said Lawrence Yun, chief economist at the National Association of Realtors. “The intense days of multiple offers are over…people can take their time.”

“Prices are not expected to decline, but our forecast suggests price appreciation will slow,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. Duncan predicted that while prices won’t repeat the meteoric 18% increase they saw last year, they will still rise by around 7.5%. “It’s not really a break, especially because interest rates will go up at the same time,” he said.

Prices are not expected to decline, but our forecasts suggest that price appreciation will slow.

Other experts have a slightly lower projection for price appreciation, but no one sees a reversal any time soon. “We haven’t seen the fundamentals change to indicate that prices are going to go down,” said Robert Frick, business economist for the Navy Federal Credit Union. “Prices will go up again this year,” he said, although he also said the rate of increase is expected to slow after last year’s torrid double-digit jumps.

As growing demand sent prices skyrocketing into the stratosphere last year, potential buyers often found themselves in bidding wars or forced to make a quick decision on the biggest financial commitment of their lives. December survey results suggest home hunters have tempered their optimism or may choose to sit on the sidelines for the foreseeable future: Fannie Mae Homebuying Sentiment Index revealed that while 76% of respondents said now was a good time to sell a home, only 26% said now was a good time to buy. In comparison, 52% of respondents had called the current market a good time to buy a home a year earlier.

“There’s always a shortage of homes for sale, so it’s a seller’s market, but homes that are overpriced tend not to budge,” said Ralph DiBugnara, CEO of Home Qualified, an online resource information and home loans.

“I think for home sellers, they need to realize that the days of double-digit price appreciation are over,” Yun said. If people are considering a sale, he added, “they should do so based on normal factors rather than trying to speculate on big price gains.”

Home sellers need to realize that the days of double-digit price appreciation are over.

These adjustments are taking place against a backdrop of rising interest rates as the Federal Reserve is heavily targeting inflation. Making borrowing more expensive reduces demand overall and can help curb inflation, but what may be good for the economy at the macro level may be painful for individual buyers, who will have to pay more to repay their debt. mortgage.

As a result, some pundits have predicted that before the market catches its breath this year, there will be a robust first quarter as people try to lock in mortgage prices lower. The rate for a conventional 30-year mortgage currently hovers around 3.5%. Various real estate experts predict this will increase by a half to a full percentage point through 2022.

“It heavily depends on what the Fed says and does,” Duncan said. The central bank’s contribution to the rise in mortgage rates is partly due to the hike in the federal funds rate, but more importantly, it is a function of the Fed’s reduction of its economic support in the era of the pandemic. .

This support included the purchase of billions of dollars of mortgage bonds each month, purchases that will end by March. At a news conference last week, Fed Chairman Jerome Powell said officials expected to discuss soon how to shrink that part of the Fed’s portfolio. Market participants will be looking to policymakers to find out whether the Fed is simply choosing not to buy new mortgage-backed securities as those on their balance sheet come due, or actively seeking to sell some of those holdings – an acceleration of the exit from the market which would be likely to have a more brutal impact on borrowing rates.

“They may demand more yield,” Duncan said of the more results-oriented mortgage buyers who will remain after the Fed’s exit. “The Fed is a political buyer, not an economic buyer.”

“From a mortgage pricing perspective…I would say the exit from bond purchases will have a stronger impact,” said Steve Kaminski, head of residential lending at TD Bank. “We don’t know where prices will end up, but we have a clear sign that the Fed intends to raise rates here,” he said.

As the Fed moderates its prodigious appetite for mortgage debt, the market will have to adjust accordingly. “Their plan is to exit the mortgage-backed securities market by March. I expect the March-April timeframe for this rate increase to be a bit more obvious,” Kaminski said.

If there is a slowdown in home buying activity this year, one silver lining for borrowers is that the same number of mortgage lenders will seek business from a smaller pool of buyers, Duncan said. . “A small moderator of rising rates will be the fact that mortgage lenders…. will compete and the profit differentials they take will decrease,” he said.

But overall, experts say the challenges remain acute for first-time buyers. “The problem for first-time home buyers is that there aren’t enough homes for sale at competitive prices. They see bidding wars on most properties. First-time home buyers have to be prepared to compromise,” DeBugnara said, whether that means on square footage, location or other features.

Buyers – whether first-timers or looking to downsize – will also continue to face competition from institutional buyers, who have aggressively targeted the so-called starter home market to hold and rent these properties. And with rising house prices and rents, it’s getting harder for people who want to own and live in their own homes to break into the market.

“You have corporations buying houses for rent, which further reduces the availability of houses… 17% of new houses are going to be owned by companies for rent,” Frick said. “We’re approaching a point where one in five homes are essentially taken off the rental property market,” he said.

We are approaching a point where one in five homes are essentially taken off the property market for rental.

“We are definitely going to see rental prices go up over the next few years. A lot of these larger funds are picking up single-family homes in bulk,” DiBugnara said. “I interpret that as they think there will be a very strong demand for single-family homes.”

As new homes are being built, experts say it’s not happening fast enough. Even before the pandemic, new home construction was failing to keep pace with demand, and Covid-19 has plagued builders with a combination of shortages and rising material and labor costs. .

Longer term, experts say the supply pipeline is improving. “We expect housing starts in new residential space to increase by about 7%,” Duncan said. “Builders are doing everything they can. If they can get the land, the labor and the wood, they will build.

“I’m encouraged that we’re going to see a lot more new homes being built this year,” Frick said. “Some of the supply constraints are easing in terms of materials. The other thing that’s important is that builders are buying a lot of land,” he said. But until the market returns to a state more like historic norms and until more new inventory becomes available on a meaningful scale, Frick warned that the dream of home ownership is fading for marginal families.

“We have to remember that for middle-income people, their primary means of accumulating wealth is through home ownership,” he said. “Home prices are driving homeownership away from first-time buyers and low-income buyers at an alarming rate.”


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