How Inflation and Rising Rates Affect Buying Power

As we enter 2022, signals from the Fed and bond markets indicate that interest rates should continue their recent rise. After spending the better part of a year in record-low territory, the recent half-point run-up in rates feels like a shock to most. Still, we all knew this was coming. Expect rates to journey on upward towards their 10-year historical average of around 4%, which should tap the brakes on the awe-inspiring rate of home price appreciation.

In 2022 we expect to support a growing share of purchase activity -- home buyers seeking to buy their first home, upsize, downsize, or invest. The pace of new construction is quickening, so more new houses should gradually appear, giving homebuyers more options. “We see 2022 as a transition year, moving from a refinance market to a purchase market,” said Mike Fratantoni, Chief Economist for the Mortgage Bankers Association. “We are expecting both 2022 and 2023 to be record years for purchase originations.”

Consumer Demand Drives Economy into 2022
The U.S. economy led the world in recovering from the 2020 slowdown. With stimulus programs and a big rise in lockdown-driven savings, American consumers upped their spending last year. Fed Chair Powell stated more than once that “very strong demand” (coupled with the pandemic) is causing bottlenecks and shortages leading to inflation.

Will housing demand stay strong?
Last year, low interest rates, cash buyers, and a lack of supply drove the 18% increase in average home purchase prices. This year, the story will be all about the degree to which inflation and higher rates affect buying power. “(We expect) a slowdown in home price growth…and that forecast hinges on this erosion of buyer affordability” said Frank Nothaft, chief economist for CoreLogic in a recent interview.

Demand for homes should still stay strong. In many markets, even with rates being higher, it is still cheaper to buy than to rent. Builders are more active, but lumber prices and shortages in labor and materials should keep the new-home supply tight and prices firm. Starter homes are most in demand, but according to Freddie Mac, are the fewest being built. Boomers are saying they intend to age in place, so a larger share of the market is remodeling, not moving.

Bottom line: Prices probably won’t skyrocket again this year, but they should continue to rise. Rates are still historically attractive, so 2022 is the year of the home purchase. Contact us to get your house hunting campaign organized and launched with a rock-solid preapproval!

Quarterly Newsletter - Spring 2022
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