The near certainty that interest rates will rise, combined with increased home buying power, will likely to send more buyers into the market, according to First American. 

“While rates are expected to increase steadily throughout 2022, many potential home buyers may try to jump into the market now before rates rise further. The fear of missing out, or ‘FOMO,’ on low rates and the potential loss of house-buying power may supercharge the housing market ahead of the spring home-buying season,” said Mark Fleming, chief economist at First American. 

Consumer homebuying power — that is, how much one can buy based on changes in income and interest rates — increased 0.6% between October 2021 and November 2021, and increased 0.4% year over year, according to the November 2021 First American Real House Price Index (RHPI). 

According to Fleming, the consensus among economists is that the 30-year, fixed mortgage rate will increase from its November rate of 3.1% to 3.7% by the end of 2022. 

“Some forecasters predict rates will reach 4%, which is still historically low, but well above what buyers have grown accustomed to in recent years,” he said. “When mortgage rates increase, holding income constant, consumer house-buying power decreases.”

Rising mortgage rates impact affordability, Fleming said, but one of the root causes of rising mortgage rates is an improving economy, and an improving economy often leads to stronger wage growth. 

Median household income has increased 4.4% since November 2020 and 68.0% since January 2000. At the same time, First America data shows real house prices are 5.6% less expensive than in January 2000. 

While unadjusted house prices are now 42.7% above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 33.8% below their 2006 housing boom peak.

“In November, year-over-year nominal house price appreciation reached 21.5% , the sixth consecutive month it has set a new record. Affordability declined 21.0% compared with a year ago, as the growth in nominal house prices combined with the 30-basis point increase in the 30-year, fixed mortgage rate vastly outpaced the 4.4% increase in income,” said Mark Fleming, chief economist at First American. “Affordability is likely to decline further in 2022, because both mortgage rates and nominal house prices are expected to rise.”

He added that “housing supply tends to increase in the spring months as more sellers list their homes for sale. While home buyers may have FOMO because of rising rates, they may not want to succumb to the fear of better options, or ‘FOBO,’ because there may be a better home option or options when there’s more homes for sale, even if it means they may pay more.”

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