The Federal Reserve is expected to raise interest rates this week — likely by 0.25% — for the first time in three years, hoping to contain soaring inflation.

As a result, mortgage rates will rise, too. So what will that mean for the housing market?

In the West, especially for buyers in high-demand states like Utah, it’s not good.

“It’s bad,” said Dejan Eskic, senior research fellow at the University of Utah’s Kem C. Gardner Policy Institute who specializes in housing research.

As the nation’s average 30-year fixed mortgage rate has risen closer to 4%, a striking 67% of Utah households are being “priced out” of the state’s median-priced home, according to Eskic’s calculations.

Utah’s median-priced, single-family home was $512,000 statewide in the fourth quarter of 2021, according to the National Association of Realtors.

“A good two-thirds of Utah cannot afford the median-priced home anywhere because of how fast rates rose in the last couple of months,” Eskic said.

The U.S.’s average 30-year fixed mortgage rate reached a record low of 2.65% in January 2021, but has jumped to 3.85% in the past three months.

If interest rates rise even more, approaching 4.5% or 5%, that percentage of Utahns who can’t afford the median-priced home could hit even closer to 70%, Eskic said.

“If you were going to wait to buy in the spring, you’re likely out of luck,” Eskic said, as rising interest rates push even more homes out of reach with higher monthly loan payments.

The Fed is set to raise interest rates. What will it mean for Utah?

Wait, shouldn’t higher interest rates help lower demand?

Utah’s housing problem continues to be a supply and demand problem — so shouldn’t rising interest rates help by dampening demand?

Not in today’s market, Eskic said.

Rising interest rates will slow demand, he said, but not “enough to completely slow the market down because there is nothing to buy.”

Low inventory remains a big issue that’s driving home prices sky high.

“Typically when we see rates rise we do see a slowdown in demand. We see a slowdown in price. Sometimes the price actually falls,” Eskic said, like when they did in mid-2018 to January 2019. Then, rates hit almost 5%, and the state saw its median sales price go from $310,000 to $301,000.

But in today’s market? Don’t expect to see prices fall, he said.

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“In the last two months, rates have risen dramatically, and we have not seen anything like that,” he said. “We’re seeing no indication of (prices) going down because inventory is so low.”

“In a normal environment,” or if the housing market were the same as it was in 2019, Eskic said interest rate hikes would spur a “de-acceleration” of prices.

But Utah’s 2022 market is far from normal.

“Inventory is so low, it’s nonexistent,” he said, noting that during this time of year would typically have between 7,000 and 9,000 active homes for sale. “And right now we probably have 2,000.”

“Because of that we’re still expected to see pretty healthy price increases,” he said.

Even with so many Utahns getting priced out, Eskic said there are plenty of buyers still driving up demand, many who have migrated into Utah.

“It’s those two factors,” he said, “low inventory and in-migration.”

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The COVID-19 pandemic upended the whole nation’s housing market as thousands of Americans reevaluated their lives and moved out of big cities in search of more space at lower price points. Many looked West, especially to states like Utah, where jobs flourish, and Idaho, where housing was comparably affordable.

As a result, states like Utah and Idaho have seen record-shattering years for house sales and price increases. In Utah, experts have warned of a “severely imbalanced” housing market as demand continues to woefully outpace supply.

But this isn’t just the fault of the pandemic. It only compounded and accelerated Utah’s housing problem. The West’s housing shortage began years ago amid the Great Recession, after the subprime mortgage crisis sent the nation’s and the world’s economy into a death spiral. After the crash, homebuilding contracted, and the market has been struggling to keep up with demand ever since.

Will higher interest rates lower prices?

Higher interest rates may slow price increases, Eskic said, but it’s not going to stop them.

It’s only going to lift what Eskic called a “mask” that’s been essentially hiding or softening the impact to homebuyers’ monthly payments.

In 2021, Utah’s home prices increased by a staggering 27% statewide, shattering the 43-year-old record of 20.1% set in 1978, according to the Salt Lake Lake Board of Realtors.

Now you need a six-figure income to afford a median-priced home in Utah’s largest county

Unfortunately, in 2022 there isn’t much good news for homebuyer hopefuls. Prices are still expected to rise thanks to low inventory — but the shred of good news is that they’ll only increase by maybe 10%, Eskic said, instead of over 20%.

That sliver of good news rings hollow, however, when prices are at record highs.

“It will just slow the acceleration,” Eskic said. “It won’t stop it.”

So in 2022, “we’re still in a painful housing market,” he said, and he doesn’t see relief until “later in the decade, unfortunately,” when aging Utahns decide to trade in their large lots for more “simplified,” smaller lots.

For aspiring homebuyers that have been waiting, holding out hope that prices might decline — hoping for the bubble to pop like it did in 2008 — Eskic said there are no indications that waiting will lead to lower prices.

Even though prices are painful today, if it makes sense for you and your family, Eskic advised pulling the trigger now rather than waiting.

“It will be much cheaper to buy now,” he said, “than it will be in two to three years.”