Rising Rates, Prices & Inflation Could Cool the Housing Market in 2022

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Mortgage rates, home prices and inflation have risen significantly in recent months. As a result, we could see a bit of a slowdown within the U.S. real estate market through the rest of 2022. Here’s how mortgage rates, inflation and rising home prices could cool the housing market in 2022.

Top 3 Factors That Could Cool the Housing Market

House values have been on the rise lately. According to Zillow, the median home value nationwide rose by a whopping 20% over the past year alone. This could have a cooling effect on the real estate scene later in 2022.

But that’s not the only factor that could put the chill on home-buying activity. Other housing and economic trends could play a role as well. Here are three factors that could slow the U.S. real estate market in 2022.

1. Rising mortgage rates have made loans more expensive.

At the end of March, Freddie Mac reported that the average rate for a 30-year fixed mortgage had risen to 4.67%. That’s quite a bit higher than where we were at the start of this year. During the first week of 2022, 30-year mortgage rates were averaging 3.22%. So they’ve shot up quite a bit with the past three months.

In its latest mortgage rates report, Freddie Mac’s research team said that “purchase demand has weakened” as a result of rising rates and other factors. When they refer to purchase demand, they are talking about home buyers in particular.

The chart below accompanied Freddie Mac’s latest mortgage rate report. It’s based on their long-running survey of lenders nationwide. As you can see over on the right, 30-year mortgage rates have risen sharply over the past few weeks. Other loan types, including the 5-year adjustable-rate mortgage, have shot up as well.

Rate chart April 2022
Chart: Average 30-year mortgage rates | Source: Freddie Mac PMMS

As we’ve already seen, rising mortgage rates could reduce demand among home buyers and by extension cool the housing market in 2022. Especially if they continue to rise.

And with recent actions by the Federal Reserve (and their plans going forward), it’s likely that mortgage rates could rise further over the coming months. Borrowers beware.

2. Rising inflation is putting the squeeze on consumers.

If you’ve been following the news lately, you probably already know that inflation has risen. According to recent reports, consumer prices rose to a 40-year peak in February 2022. One forecast predicted that inflation could rise to its highest level since 1981, later this year.

This affects the housing market in several ways, all of which could have a cooling effect.

For one thing, mortgage rates tend to rise when inflation rises. That’s because the Fed typically increases the federal funds rate to help curb inflation, which can affect consumer borrowing costs. We’ve seen evidence of this already (see item #1 above). This could further reduce demand among would-be home buyers.

Rising inflation also reduces people’s overall purchasing power. It can make everything more expensive, from gas to food to clothing. When people have less money to spend on their daily living expenses, they’re less likely to enter the housing market. Many home buyers adopt a “wait-and-see” approach during times of rapid inflation.

Rising inflation could also cool the housing market by creating a sense of economic uncertainty. There’s a lot of uncertainty in the world right now, from the economic to the geopolitical. In such times, people who had planned to buy a home can become increasingly hesitant.

All of these inflation-related trends could cause the housing market to cool down in 2022.

3. Home-price growth is outpacing wage growth, by a lot.

Over the last 18 months, we have seen unprecedented home-price growth in real estate markets all across the United States. Some of the hottest real estate markets experienced annual price growth of more than 30%. That’s miles above the historical average, going back 40 years or so.

Wages and salaries, on the other hand, have risen at a much slower pace. They’re like Aesop’s tortoise and the hare (with wage growth being the tortoise).

According to the latest data, wages and salaries in the U.S. rose by 4.4% in 2021. That’s the largest year-over-year increase we’ve seen in a while — which is a good thing. But it doesn’t come anywhere close to tremendous home-price growth of the past year.

The median home value in the U.S. rose by around 18% to 20% during 2021, depending on the source. That means house values rose more than four times as much as wages and salaries.

The chart below, published by CNBC a few months ago, shows how U.S. home values and median income levels changed from 1965 to 2021. You can see how the gap between the lines has gotten wider over the decades, and especially within the last couple of years. 

prices vs income chart

This gap has reduced affordability in real estate markets across the country. This in turn has reduced the number of buyers who can afford to purchase a home. This is just one more factor that could cool the housing market later in 2022.

Disclaimer: This article makes forward-looking predictions that are the equivalent of an educated guess. The Home Buying Institute makes no assertions about future housing or economic conditions.