Will Higher Mortgage Rates Slow the Real Estate Market in 2022?

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Will rising mortgage rates cause the real estate market to slow down in 2022, after months of over-heated activity? Some forecasters seem to think so. Mortgage rates just shot up to their highest level since 2020.

Over the past few months, some economists and analysts have predicted that home loan interest rates would rise during 2022. Now, as we approach the end of January, we’re seeing clear signs of upward movement.

The average rate for a 30-year fixed mortgage loan just rose above the 3.5% threshold for the first time in nearly two years. The question is, how will this trend affect the housing market in 2022? According to one forecaster, rising mortgage rates could cause the U.S. real estate market to slow down in 2022.

Mortgage Rates Rise in Early 2022

On January 20, researchers from Freddie Mac announced that the average rate for a 30-year fixed mortgage rose to 3.56%. That number is signifiant for a number of reasons:

  • It marked four consecutive weeks of rate increases.
  • It was 50 basis points (0.50%) higher than a month earlier.
  • It was the highest average since March of 2020.

The chart below shows the average rate for a 30-year fixed mortgage loan over the past year or so. This chart was published along with the January 20 Freddie Mac report mentioned above.

Mortgage rates January 2022
Chart: Average 30-year mortgage rates | Source: Freddie Mac PMMS

The right side of the chart shows rate trends over the past few weeks. You can see the steep upward rise since mid-December of last year. You’ll also notice that 30-year mortgage rates are currently hovering at their highest level of the past 12 months.

If we zoomed out this chart to show the past three years, you’d see that 30-year mortgage rates haven’t been above 3.5% since March 19, 2020. That means they just reached the highest level in nearly two years.

The general consensus among forecasters is that rates will continue to climb during 2022. For instance, a January 21 forecast from the Mortgage Bankers Association predicted that the 30-year mortgage rate average could reach 4% by the end of this year.

Granted, today’s rates are still pretty low from a historical standpoint. (They were around 8% in 2000, and above 10% in the 90s). Even so, the current upward trend in mortgage rates might be enough to slow the real estate market in 2022 — especially if they keep climbing over the coming weeks.

A Slower Housing Market Ahead?

The U.S. housing market moved at warp speed during the second half of 2020 and through all of 2021. Now, as we approach the last week of January 2022, we’re seeing signs of a cooling trend.

According to data released by the National Association of Realtors (NAR) last week, existing home sales declined 4.6% in December 2021 compared to the previous month. Sales were also down when measured year-over-year.

To quote the January 20 NAR report:

“Existing-home sales declined in December, snapping a streak of three straight months of gains … Each of the four major U.S. regions witnessed sales fall in December from both a month-over-month and a year-over-year basis. “

Sam Khater, the chief economist for Freddie Mac, believes that housing demand could drop further as mortgage rates continue to climb. “[W]e do expect some moderation in housing demand,” Khater said in a recent statement.

Still Plenty of Competition Among Home Buyers

But home buyers shouldn’t be lulled too much by all of this “moderation” talk. Even if the real estate market slows down a bit in 2022 — due to rising mortgage rates and/or other factors — it will still remain highly competitive. That’s due to an ongoing shortage of housing market inventory nationwide.

As Freddie Mac’s Sam Khater explained it: “a shortage of entry-level inventory of homes for sale should keep the housing market competitive.”

It seems the most fierce competition will occur at the lower end of the pricing spectrum, for so-called “starter homes.” As we wrote in a previous report, first-time buyers seeking a smaller, lower-priced home might be surprised by the sheer lack of inventory in 2022.

But real estate market conditions can vary by location. Some local housing markets have more demand and less inventory, and are therefore highly competitive. Other cities have a better balance, making it easier to find a home.

Overall, however, 2022 should be another competitive year for the U.S. real estate market, even if rising mortgage rates slow things down a bit.

Disclaimer: This article includes predictions issued by third parties not associated with the publisher. The Home Buying Institute makes no assertions about future mortgage industry or real estate market trends.