- Mortgage rates are influenced by the Fed’s rate hikes.
- A sharp rise in mortgage rates reduces the buying power of homebuyers.
- Although home prices have trended higher, home sales have trended lower.6
Whether you’re in the market for a new house or know someone who is, you’ve likely seen articles on higher mortgage rates and rising home prices. It’s true, the market is looking different than it did in 2020 and 2021.
Here’s a recap of what’s been going on, and the impact it’s having on homebuyers and homeowners.
What’s Happened in the Housing Market This Year?
Homebuilder sentiment has declined steadily throughout 2022. The National Association of Home Builders cites reasons including rising mortgage rates, high home prices, and supply chain disruptions to building supplies.1
How High Inflation Impacted the Housing Market
Inflation rose in 2022, hitting a 40-year peak of 9.1% in June 2022. Consumers have seen the direct impact of high inflation on groceries, gas prices, appliances, building materials, menu prices, and more.2
The primary tool used to combat high inflation by the Federal Reserve is interest rates—when one goes up, the other should come down. So far in 2022, the Federal Reserve has raised interest rates five times, bringing rates from nearly 0% to around 3.25% as of early October 2022. This is a significant and aggressive move that hasn’t been seen in the U.S. since the 1980s.3
While the goal is to curb rising inflation, the Fed has to consider the economic “ripple effects” of raising rates. Raise them too fast and too high, and the Fed risks sending us into a recession. Take too little action, and inflation continues to rise.
So, how does this relate to the housing market?
Mortgage rates are influenced by the Fed’s rate hikes. While homebuyers a year ago saw interest rates of around 3% for a 30-year mortgage, that percentage more than doubled to around 6.7% by September 2022.4
This rise in mortgage rates reduces the buying power of homebuyers. For example, a $300,000 mortgage at last year’s 3% 30-year fixed rate would have resulted in a monthly payment of $1,265 (before taxes, escrow, insurance, etc.). That same $300,000 mortgage at today’s 6.7% would come to $1,936 per month—a $671 monthly increase, or an extra $8,052 per year. Add on potential property taxes and insurance costs, and some homebuyers find themselves in a difficult situation.5
Home Prices Continue to Rise
Not only are homebuyers up against rising rates, but the actual cost of homes has been trending upward in 2022. Over the summer of 2021, the average price of sold homes was $382,000. A year later, the average cost has risen to $440,300. While home prices have remained stubbornly high, existing home sales have slowed this year. In January 2022, 6.5 million homes were sold during the months. By August, that number had dropped to 4.8 million.6
Supply Chain Disruptions
Covid disrupted the global supply chain, as well as the available labor force. The construction industry continues to struggle with long lead times, a lack of delivery drivers, and rising material and energy costs.7
Here’s a quick look at current lead times for common homebuilding materials compared to 2020:7
- Roofing insulation: 40-50 weeks, up 800%
- Appliances: 20-30 weeks, up 400%
- HVAC equipment: 36-50 weeks, up 250%
The actual cost of materials, especially imported goods, is rising at a rapid pace as well. The cost of iron and steel is 76.1% higher than it was in 2020, and lumber is up 66.1% due to changes in tariffs and shipping costs.7
As a result of the current construction landscape, contractors have to consider raising prices and home buyers are potentially spending more on new builds and renovations.
Focus on the House More than the Rate
While the focus of this blog has been primarily on rising interest rates, there’s a piece of good news to keep in mind; you may be able to refinance your mortgage later down the line. If you find a dream house, and it’s within your budget, try not to let the psychology of higher interest rates stop you from going after it.
That being said, it is important to consider your options regarding the term and structure of a mortgage. Buying a house is a very personal and important decision, and there are many factors to weigh into a decision to buy.
Keeping Your Personal Finances Top-of-Mind
This year’s economic environment has been a challenging one to navigate, especially for eager homebuyers. And while we’ll continue seeing ups and downs in the market as a new year approaches, it’s important to step away from the news cycle and consider what’s most important: your personal financial picture. Whenever you see negative percentages, high prices, or scary predictions, it can take focus away from your own long-term goals.
Whether you’re currently in the homebuying process or looking to take advantage of your home’s rising value, we're happy to discuss your options. Real estate is just one piece of the puzzle, and you should consider how it works in alignment with your greater financial strategy and goals.
- NAHB.org, 2022
- Statista.com, 2022
- Bankrate.com, 2022
- Freddiemac.com, 2022
- Mortgagecalculator.org, 2022
- Fred.stlouisfed.org, 2022
- CBRE.com, 2022
The content is developed from sources believed to be providing accurate information. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.