Fast-Rising Mortgage Rates Are About to Make the Housing Market Even Crazier

TThis week, the average interest rate on a 30-year fixed-rate mortgage rose to 3.45%, according to Freddie Mac. That’s the highest rate since March 2020. In the near term, the surge should boost home demand as potential buyers seek to secure a mortgage before interest rates climb even higher.

In a recent survey, real estate agent Redfin asked home buyers and sellers how interest rates rising above 3.5% would affect their housing plans. Of those surveyed planning to make a purchase this year, 47% said they would feel more urgency if interest rates went that high.

Another 29% said they would look for smaller homes or in different areas, while 14% said they would slow down their search in hopes prices would go down. Only 7% said the higher rate would not change their plans, and only 2% would cancel their plans altogether.

With experts assuming that interest rates will continue to rise, this survey can be an indication of where the real estate market will develop in the coming months. For example, Daryl Fairweather, Redfin’s chief economist, expects rates to hit 3.6% by the end of the year.

“Rising mortgage rates will make home buying less affordable. Over time, this will slow demand and put an end to double-digit annual price growth,” Fairweather said. “But in the short term, this surge will set homebuyers ablaze and make for a highly competitive January.”

Although rising interest rates can increase the incentive to close a deal earlier, buyers still have to contend with a housing market that lacks enough inventory to meet demand. For the four-week period ending Jan. 2, Redfin reports a 27% year-over-year decline in active listings and a 10% decline in new listings.

However, there is positive supply news in some markets.

Redfin agents in some of the hardest-hit markets in terms of inventory have noticed increased homeowner interest in selling. Many of these would-be sellers have already begun dressing up their homes in preparation for the IPO earlier this year.

Fairweather noted, “This gives me hope that more sellers will be motivated to take action now that the new year has arrived.”

Buyers not only have to contend with higher rates and low inventories, but also high home prices. During the four-week period ended Jan. 2, home prices rose 14% to a median selling price of $358,460. Most experts expect property prices to rise this year, but at a slower pace than 2021.

“This month sets the stage for the 2022 housing market and we will be watching closely to see if prices rise as usual in January or if they start high and stagnate due to rising mortgage rates,” Fairweather said.

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