Mortgage Rates Rising in 2022, How are Homebuyers Affected?
Last week, the Federal Reserve announced it will begin to fight inflation through a restrictive monetary policy. The Fed aims to drastically increase rates next year to make borrowing more expensive for businesses and individuals and stabilize the demand and soaring prices seen in the housing market.
During the start of the COVID-19 induced recession, the Fed significantly cut short-term and long-term rates and bought back billions of dollars worth of Treasury and Mortgage-Backed Securities in an attempt to stimulate the economy.
Home prices have surged to unprecedented levels following the pandemic because the shift to remote work fueled demand for bigger houses, and consumers took advantage of the historically low rates.
What Does This Mean for Homebuyers?
Nadia Evangelou, a senior economist and director of forecasting for the National Association of Realtors, states, “When the Fed increases its interest rates, banks do, too…And when that happens, mortgage rates go up for borrowers”. When the cost of borrowing increases for banks, they raise the interest rates they offer to consumers in an attempt to offset their increased cost of capital.
With the expectation of high inflation continuing throughout 2022 and rising mortgage rates, consumers should expect to see downward pressure on home prices.
As a consequence of the Federal Reserve’s interest rate spike, homeowners will be forced to spend more on their monthly mortgage costs, depleting affordability. A lack of affordable mortgages in the market will convince potential homeowners to delay the purchase of homes, slowly flattening the currently high demand curve and stabilizing prices.