The Housing Market Faces Its Biggest Test

There has been no shortage of theories on how the ongoing housing boom is going to end. Reopening corporate officers were supposed to tamp down on remote workers buying in far-flung places. As stimulus aid got further in the rearview mirror, it was thought home shoppers would pull back. With the shutdown of the mortgage forbearance program last fall, many had also expected that additional inventory would pile onto the market.

While the market is still scorching hot, the housing market now faces its biggest challenge in the form of soaring mortgage rates. When the pandemic struck in March of 2020, the Fed moved interest rates downward in order to spur up economic activity during the pandemic. As home prices soared, the low rates being offered also helped to alleviate some of the burden for homebuyers. However, as interest rates continue to rise as we're seeing, we see more and more potential buyers being shut out from being able to purchase the home of their dreams.

With higher rates approaching above 5%, you will surely have many buyers become priced out of the market. In addition, another consequence could also be that investor activity wanes as a result of the loss of incentive with low rates.

To demonstrate the effect of the higher interest rates, let's demonstrate how a 3.11% fixed rate comes out to monthly on a $400,000 mortgage as opposed to a fixed rate of 4.42%. At a 3.11% fixed rate, the buyers would owe a monthly payment of $1,710 over 30 years, whereas with a fixed rate of 4.42% that same payment becomes $2,008, effectively an increase of $300. With rates climbing towards 5%, this same payment now becomes $2,147. These are significant increases for buyers to stomach. Considering that home prices are up an average of nearly 18% year over year, alongside ongoing inflation and stagflation hitting consumers in all aspects of daily spending, it is safe to say that buyer activity will noticably slowdown.

Some housing experts do mention that the rise in rates will help to bring more inventory to the market, while also lasting on the market for a greater period of time. Some hope as inventory increases and the advantageous nature of the market for sellers diwndles, the asking price expectations of sellers will likely also cooldown and call for a much needed correction in home values

It is tough to see how the market will work itself it out over the next few months.

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