As Q3 winds down for 2022, I wanted to provide some insights into where the housing and mortgage markets are, and what’s likely to occur going forward.  If Q2 was to be summed up with one word, it would likely be volatility.  We witnessed 2 aggressive Fed rate hikes, with opposite market reactions each time.  Interest rates on mortgage loans began to decline after the Fed’s June rate hike of .75 as it signaled dedication from the Fed in the fight against inflation.  When the Fed again hiked rates in September, mortgage rates spiked as the markets seemed to have lost faith in the Fed’s ability to quickly reign in stubborn inflation.
While headlines in the media focus on a lot of different things from the Fed to an overhyped housing market, the real driving rate on all other things mortgage and real estate related has been interest rates, and the cause of their volatility – inflation.
I’m sure you’ve felt inflation at the gas pump, at the grocery store, and certainly if you’ve bought a home since rates began their hasty climb in March of this year.  This inflation is the arch enemy of mortgage rates, because mortgage loans are long term investments with a fixed rate of return (on fixed rate loans) – if investors feel their profits from mortgage notes will be less valuable in the future (will the fixed number of dollars they’re getting buy them less in the future?) they need to increase those profits by demanding higher interest yields.  This is what causes rates to climb.  Rates moved up faster and in a shorter amount of time than at nearly any other point in the history of mortgage rates.  And with home values at their highest points in history, many buyers have been either sidelined completely or left contemplating whether now is a good time to buy.

What Will Happen To Home Prices?

Home prices have definitely felt the effects of higher interest rates, with record setting rates of appreciation in 2020-2021 coming to a halt in 2022.  For the calendar year 2022, high appreciation is still expected, but it slowed in Q3 and that slowing may continue into Q4.  So what’s likely to happen to home prices going forward?

Part of the direction of home prices and values will depend on rates, but will continue to depend more largely on supply and demand.  Supply is still low, as you can see in the graphic below – it illustrates inventory in the US, and though housing inventory has spiked in 2022, it still lags behind historical norms.  So supply is low, which puts upward pressure on prices.  But, if rates continue to climb, it could further sideline more buyers, reducing demand.  Currently, builder confidence numbers have been low and new home completions have also lagged.  To further pressure supply downward, home resales have slowed also largely due to rate increases as current home owners don’t want to trade the low rates they’ve obtained over the past few years for today’s higher rates.  These factors are keeping supply low, helping support home prices despite the drop in buyer demand thus far in 2022.

inventory in the US has increased in 2022, but still lags behind historical norms

inventory in the US has increased in 2022, but still lags behind historical norms

Some markets have seen a large pickup in supply and huge growth the past couple of years – these markets may see a correction as they have an imbalance in supply and demand that most of the nation doesn’t have.  Each market is unique, but overall we expect home values in the US to remain stable, balancing between slight appreciation and very minor price drops in most areas, with a few outlying markets experiencing larger swings.  Should rates come down, though, more buyers would enter the market with tight supply, putting more upward pressure on home prices.  So the direction of home values is also tied very tightly to the interest rate market.


Where are rates headed?

Mortgage rates will continue to be volatile due to a variety of factors, but considering inflation has been the driving force pushing them up, it should also be what brings them down.  As the Fed continues to increase the Fed funds rate in an effort to fight inflation, the impacts will eventually be seen in the economy.  Historically, Fed rate increases are followed by recession, and recession has typically led to environments of lower mortgage rates.  Inflation should also come down simply based on how inflation is measured, with year over year figures replacing prior year’s monthly readings.  Inflation was very low in the summer of 2021, so as higher monthly figures replaced lower monthly figures with higher inflation in the summer of 2022, inflation spiked.  We saw substantial increases to inflation in the fall of 2021, so the numbers being replaced in the fall of 2022 should indicate inflation is under control, which could pressure mortgage rates downward, but these numbers won’t start being released until November (when October’s inflation numbers are released).

Inflation spiked last October after low summer numbers

Inflation spiked last October after low summer numbers

Considering we’re currently sitting on the highest rates seen in the mortgage market in over a decade, it seems like we have more room to the downside for rates than the upside, and if we see a combination of reduced inflation and economic reports showing a slowing in the economy, it’s a fair bet that mortgage rates will be heading down – the question is when.   Of course, we don’t have a crystal ball, and economic events tend to unfold slowly, but we should start seeing inflation fade mid-fall with the economy already showing some signs of slowing, so if I had to guess, I’d say we’ll see relief start to come to interest rates before 2022 is through.


What Lending Options are Right for This Market?


There are a variety of mortgage loan products for a reason – all offer benefits and pitfalls for different scenarios and different individuals, but my perspective is this:  if you can weather higher payments short term, then lower cost loan options are a better bet in today’s market.  But if monthly finances are tight or there’s uncertainty about income or future employment, it may make sense to spend more on today’s closing costs for a reduced payment on a fixed rate product.  For most people, it appears there may be refinance opportunities on the horizon (when rates that cost thousands of dollars today may be free), but nothing about the economy or rates is certain aside from uncertainty!  Most adjustable rate products today are also less risky than those of yesteryear, lacking things like prepayment penalties and with minimum fixed rate periods of 5+ years, so ARM loans can also be a good way to save some money initially with a plan to refinance in the future.

Your best bet is always going to be to work with a loan officer that has a good grasp of the market, understands the current environment, and can tailor a choice to your needs, goals, and finances.  In a market like this where lenders are struggling for volume, you’ll see tons of gimmicky loan options out there – we have them, too!  Lock & shop, permanent rate buy downs, temporary rate buy downs, interest-only loans, 40 year loan options – product diversity is a great thing, however all of these programs offer tremendous benefit to a very small market segment, but are often sold as a solution for everyone.  The wrong product decision could cost you thousands of dollars in a market as volatile and quickly moving as the one we’re currently seeing.  If you or anyone you know is going through a life moment where they need a home loan (selling to move up, downsize, or change location, or refinancing due to the need for cash out, debt consolidation, death, divorce, or other life event) I’m happy to offer up advice and product recommendations.


As the market continues to change day to day, we’ll continue to keep you up to date on where the market is and where we think it’s heading.