Gone are the uber-low mortgage rates of 2021. Indeed, average 30-year-fixed mortgage rates have risen from roughly 3.5% to about 5.6% this year, and pros say they expect them to climb further (see the lowest mortgage interest rates you can get now here). One might think that these rising rates would help temper home price growth, as families become less likely to be able to afford a mortgage, but is that true? And what else is happening with home prices? We asked five pros to weigh in.
Prediction 1: Inventory shortages mean home prices may keep rising
The supply of homes available for sale is so low that even a big dent in demand as a result of higher rates will not transform this into a buyer’s market, pros say. “Home prices will keep going up because there aren’t enough houses available to meet demand, but the combination of rising home prices and elevated mortgage rates means fewer people will be able to afford to buy,” says Holden Lewis, home and mortgage expert at Nerdwallet, who predicts that mortgage rates will keep rising but at a slower pace than they did over the last few months (see the lowest mortgage interest rates you can get now here). This means demand will likely drop off in the fall and winter, though home prices will continue to rise, albeit more slowly, Lewis says.
Prediction 2: Cash buyers are still playing a big role in this housing market — and that means rates don’t have as big an impact as you might think
“Nearly 30% of transactions are taking place in cash, so there’s a sizable contingent of buyers that are not interest-rate sensitive,” says Greg McBride, chief financial analyst at Bankrate. That means that rising rates won’t have as big of an impact on this housing market as one might think.
Prediction 3: Demand will remain high(ish), and so will home prices
Rapidly rising mortgage rates have had a negative impact on demand for mortgages since the start of the year, but there’s no indication that demand has plummeted, says Jacob Channel, LendingTree’s senior economic analyst. As of April, the Mortgage Bankers Association predicts that total mortgage originations will total $2.58 trillion in 2022, a 35.5% decrease from 2021. While that is a large drop, it’s important to note that if originations were to total $2.58 trillion they’d still be higher than in 2019. Meanwhile, data from the Census Bureau and HUD indicates that the median home price for new residential homes in March 2022 was higher than it was in March 2021, despite rising rates. “This suggests that people are still willing to pay top dollar for houses even in a rising rate environment,” says Channel.
The cost of financing the typical home listed for sale has increased significantly in the last year, which has caused many shoppers to rethink budgets and likely knocked some households out of the home purchase market for now, says Realtor.com economist Danielle Hale. But at the same time, a large number of young households still desire home ownership and feel urgency to find a home and lock in a rate before mortgage rates and home prices climb again (see the lowest mortgage interest rates you can get now here). “Combine these adjustments to shifting financial conditions with the still-large share of households at key home buying ages and the decades-long under-building in the housing market that has left the market undersupplied, and it’s a recipe for prices to remain high,” says Hale.
At the end of the day, home-buying demand has thus far remained resilient in the face of rapidly rising prices and recent interest rate gains, both of which limit what home buyers can afford. “There will be a point when costs become too high for too many and price growth begins to slow, but we’re a long way from anything resembling a normal market by pre-pandemic standards. There are far fewer homes for sale than what the market would normally expect this time of year and homes continue to sell remarkably quickly. Zillow economists expect home values to grow another 14.9% over the next year,” says Zillow senior economist Matthew Speakman.
Prediction 4: It would take a big event to send home prices plummeting
Ultimately, for rising rates to torpedo home prices, we’d have to see considerably less demand and considerably more housing supply than what we’re currently seeing, pros say. “Even if price growth does cool this year, all current data indicates that it’s highly unlikely that home prices will plummet. Barring some sort of large-scale mortgage defaulting that triggers massive home selloffs like what we saw prior to the 2008 financial collapse, or mortgage rates suddenly climbing to the double-digit levels they were at in the early 1980s, it seems like high home prices are here to stay,” says Channel.