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How will mortgage rate hikes impact homebuyers? Here’s how much home prices have gone up

U.S. housing market hurtling toward uncertainty, National Association of Realtors chief economist says

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A “for sale” sign is pictured at a home in Cottonwood Heights on April 15, 2022.

A “for sale” sign is pictured at a home in Cottonwood Heights on April 15, 2022. The booming housing market has largely contributed to the U.S.’s economic comeback from COVID-19, but today the market is facing a cloud of uncertainty, the National Association of Realtors’ chief economist says.

Jeffrey D. Allred, Deseret News

The booming housing market has largely contributed to the U.S.’s economic comeback from COVID-19, but today the market is facing a cloud of uncertainty, the National Association of Realtors’ chief economist says.

“Housing kept the economy afloat as home prices rose and buyer demand intensified,” Lawrence Yun said to real estate agents and industry experts during the association’s2022 Realtors Legislative Meetings on Wednesday.

“However, this year has already thrown some curveballs, including record-low inventory and unyielding inflation.”

While builders race to meet demand, supply is on the upswing, he said, but inflation and other factors like the Russia-Ukraine war and escalating fuel prices continue to strain the market.

The most immediate impact to homebuyers this spring has been the spike in mortgage rates as the Federal Reserve has sought to temper inflation.

As part of its promise for aggressive action to staunch record-high U.S. inflation, the Federal Reserve bumped its benchmark lending rate .5% on Wednesday. It’s the biggest incremental jump in 22 years.

Today’s mortgage rate: On Wednesday, Freddie Mac reported the average interest on a 30-year fixed-rate mortgage is 5.27%, the highest in over a decade.

“Mortgages now compared to just a few months ago are costing more money for homebuyers,” Yun said. “For a median-priced home, the price difference is $300 to $400 more per month, which is a hefty toll for a working family.”

The cost: Purchasing a home is now 55% more expensive than it was just a year ago, according to the National Association of Realtors’ calculations.

Rising mortgage rates and prices continue to strain affordability. While wages are improving, Yun said they have been “wiped away” because of inflation.

“Wages have risen by 6% from one year ago and that’s good news,” Yun said. “But inflation is at 8.5%.”

What’s next? Yun predicts inflation will remain up for the next several months and the housing market will see more monetary policy tightening through a series of rate hikes.

As a result, Yun predicted the higher rates will slow the housing market, citing a five-month decline in pending home sales, as well as a drop in newly constructed single-family homes.

The big picture: Headed into this spring, national housing experts and economists have pointed to early signs that the nation’s hot housing market is showing signs of cooling as inflation and the Fed’s interest rate hikes continue to up the pressure.

Experts have looked specifically at Western cities, especially Boise, Idaho, for what they consider the top most “overvalued” housing markets. Moody’s Analytic’s chief economist recently predicted overvalued cities like Boise could see an up to 10% drop in prices as the market cools.

Three Utah cities have also ranked in the nation’s top 10 overvalued markets, close behind Boise. Those include Ogden, with an over 63% premium; Provo, with an over 54% premium; and Salt Lake City, with a 53.8% premium, according to Florida Atlantic University’s research.

Is there a bubble? Federal Reserve researchers have warned U.S. housing prices have become “unhinged from fundamentals,” but they say it’s not at all like the bubble that preceded the market crash and global financial crisis in 2007 and 2008.

While prices are at record highs, experts don’t see the same level of speculation that contributed to the Great Recession. Today’s demand is real, they say, especially in rapidly growing states like Utah, which already faced a housing shortage far before the pandemic sent the national housing market into upheaval.

Here in Utah, local experts have said rising mortgage rates will likely only slow — not stop — housing price increases while pricing out even more potential homebuyers.