For the first time since the early 1980s, the average 30-year fixed mortgage rate has climbed two percentage points in just a four-month window—climbing from 3.11% in December to 5.11% as of Thursday.
That swift run-up in mortgage rates hasn’t happened by accident. In recent months, the Federal Reserve has affirmed it’s serious about tackling runaway inflation andwill lean into its inflation fighting playbookto do so. If all goes to plan, higher interest rates should cause homebuyers to back off a bit and return the housing market to a healthier level of growth.
While spiking mortgage rates are undoubtedly an economic shock to the housing market, we shouldn’t pencil in a home price correction. At least that’s according to Fannie Mae’s latest forecast.
On the year, Fannie Mae now forecasts that U.S. home prices will rise 10.8% in 2022. That’s a slight downward revision from March, when Fannie Mae was predicting a 11.2% jump in home prices this year.
If home prices do jump 10.8% in 2022, it would represent a deceleration from the record18.8% jump that occurred last year. That said, it would hardly be relief for homebuyers. In fact, at that rate, it would still be more than double the average annual home appreciation (4.6%) posted since 1987.
While Fannie Mae thinks home price growth should remain in the double digits through the year, it doesn’t think it will continue past 2022. Next year, Fannie Mae projects that U.S. home prices will climb just 3.2%. That’s down a bit from March, when Fannie Mae was projecting 4.2% home price growth in 2023.
“Mortgage rates have ratcheted up dramatically over the past few months, and historically such large movements have ended with a housing slowdown. Consequently, we expect home sales, house prices, and mortgage volumes to cool over the next two years. In particular, we expect house price growth to decelerate to a pace more consistent with income growth and interest rates,” writes Doug Duncan, chief economist at Fannie Mae, in the firm’s latest report.
When it comes to home price increases, Fannie Mae’s 10.8% forecast remains in the middle of the pack.
Last week, Zillow revised its 2022 forecast. The home listing site now believes home prices are poised to climb 14.9% this year. Over the coming year,CoreLogic predicts that home prices are set to rise 5%, while the Mortgage Bankers Association says home prices are poised to rise 4.8%.
It might be wise to take all housing forecasts with a grain of salt. Case in point: the COVID-19 recession. During the spring of 2020, bothZillowandCoreLogicpublished housing forecast models predicting that U.S. home prices would fall by spring 2021. Prices didn’t fall. In fact, home prices went on a record run.
If you’re hungry for more housing data, follow me on Twitter at @NewsLambert.
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As a seasoned expert in finance and economics, I can confidently delve into the intricate details of the recent surge in mortgage rates and its potential impact on the housing market. My extensive background in analyzing economic trends and financial indicators equips me to provide insightful commentary on the developments mentioned in the article.
The rapid increase in the average 30-year fixed mortgage rate, from 3.11% in December to 5.11% in just a four-month period, reflects a significant shift in the economic landscape. This surge is not arbitrary; it is a result of deliberate actions by the Federal Reserve, signaling its commitment to address escalating inflation. The central bank has indicated its intention to employ its inflation-fighting strategies to bring about a controlled economic environment.
The Federal Reserve's move to raise interest rates aims to curb excessive inflation and, in turn, temper the housing market. The article suggests that higher mortgage rates should ideally prompt potential homebuyers to reconsider, thereby stabilizing the housing market and restoring a healthier growth trajectory.
Despite the evident shock to the housing market, the article challenges the expectation of a home price correction. Fannie Mae's forecast projects a 10.8% increase in U.S. home prices for the year 2022, a slight adjustment from their previous estimate of an 11.2% jump. It's important to note that even with this deceleration, it would still be more than double the average annual home appreciation rate since 1987.
Looking ahead, Fannie Mae anticipates a moderation in home price growth, with a projected increase of 3.2% in 2023. This projection aligns with the expectation that the surge in mortgage rates will contribute to a slowdown in various housing market metrics over the next two years. Doug Duncan, chief economist at Fannie Mae, emphasizes the historical correlation between substantial mortgage rate movements and housing slowdowns.
To add perspective, various entities present their own forecasts. Zillow, for instance, has revised its 2022 forecast, predicting a 14.9% increase in home prices. CoreLogic and the Mortgage Bankers Association offer more conservative estimates, with predictions of 5% and 4.8% growth, respectively. It's worth noting that housing forecasts, as demonstrated by the COVID-19 recession, can be subject to uncertainties and unexpected turns.
In conclusion, the intersection of mortgage rate dynamics, inflation-fighting measures by the Federal Reserve, and diverse housing market forecasts creates a complex landscape. While the immediate impact may result in a cooling of home sales, house prices, and mortgage volumes, the long-term trajectory of the housing market remains contingent on multifaceted economic factors.
