3 Housing Market Changes: What Rising Interest Rates Mean for 2022 Housing

Mortgage rates have already jumped a whopping 57 basis points since the start of last year, with the average rate on 30-year loans sitting at 3.22% -- the highest point since at least May 2020.

Unfortunately, that upward trend is only likely to continue as 2022 goes on. With the Fed pulling back on its purchases of mortgage-backed securities, not to mention a flurry of potential hikes in the federal funds rate -- Goldman Sachs predicts four by the end of the year -- it's almost inevitable.

But just how much will they rise? That's uncertain. Economists vary widely in their predictions. Over at the Mortgage Bankers Association, experts forecast a 4% rate by year's end. Fannie Mae expects just 3.30% (though we've nearly surpassed that number already).

Person putting for sale sign on house.

Image source: Getty Images.

Regardless, it seems homebuyers, homeowners, and real estate investors can expect some sort of jump in interest rates this year -- and the market will undoubtedly feel the repercussions. Those might include the following.

1. A pullback in buyer demand (and competition)

Last year saw one of the hottest and most competitive housing markets in history, and it was largely driven by record-setting low mortgage rates.

It's true: At one point last year, 30-year rates bottomed out 2.65% -- the lowest point ever recorded (since 1971) by Freddie Mac.The result was a high-stakes market where, last spring, a jaw-dropping 72% of buyers found themselves in a bidding war.

This year, you can expect some of that competition to wane. Buyers will pull back slightly as higher rates make homes less affordable, and there should be fewer bidding wars for those still on the market. This could also help buyers avoid some of the more risky tactics they were forced into last year -- things like waived inspections or appraisal contingencies.

2. A slowdown in refinancing

With rates so low, refinancing was huge last year. In fact, in just the first half of 2021, $1.6 trillion in loans were refinanced -- a jump of 33% over the year prior. Lenders were inundated with refinances, and homeowners across the nation were able to shave hundreds off their monthly payments and thousands off their long-term interest costs.

As rates inch up, though, the incentive to refinance wanes. Even just a small increase in rates can significantly cut down on a homeowner's savings and make the refinancing process -- which comes with closing costs, fees, and a good amount of hassle -- just not worth it for many people.

3. A slower rate of price growth

Home price growth has been astronomical in recent years. According to the Federal Housing Finance Agency, the national median price jumped 19.2% between July 2020 and July 2021 alone. But that was also on the back of bargain-basement rates and a pandemic-driven need for space (and new scenery).

Now that both of those trends are largely behind us, it's likely that price growth will start to taper off as we get further into 2022. Freddie Mac forecasts home prices will rise just 2% for most of this year (even less toward the end), while property data firm CoreLogic predicts about a 6% increase. Both are miles more manageable than the skyrocketing prices we've seen recently.

Make no mistake, though: Prices aren't suddenly going to drop. Demand is still pretty strong (thanks to millennials hitting their prime homebuying age), and supply is woefully short. Until those come more into alignment, prices are going to keep rising -- at some pace, at least -- for the foreseeable future.

What it means for your real estate goals

If you're hoping to make some real estate plays this year, it's important to keep this changing market in mind as you start to make your move.

For existing homeowners, that means pulling the trigger soon if a potential refinance is in the cards, and for hopeful homebuyers, it means preparing to make some sacrifices along the way. With rising rates, you may need to buy a smaller, lower-priced home in order to get a monthly payment you can afford. If you can swing it, saving up for a larger-sized down payment or stowing away cash to buy discount points can help as well.

Either way, planning ahead is going to be crucial, so get with an agent, line up a lender, and start mapping out your strategy today. The market moves fast -- and you might need to do the same.


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