The ‘shocking’ impact of mortgage rates and where Utah’s housing market goes from here
Thanks to rising rates and prices, 70% of Utah households are priced out of a median-priced home
The latest research from one of Utah’s leading housing experts reveals just how much of an impact the over 5% mortgage rates have had on the cost to buy a home — as well as what may be in store for the Utah housing market over the next few years.
He is predicting the market is poised to turn a corner and begin to cool. But don’t hold your breath for a “bubble burst” or for actual price drops.
“I expect we’re going to slow down here,” Dejan Eskic, senior research fellow at the University of Utah’s Kem C. Gardner Policy Institute, told the Deseret News in an interview. However, he added: “I don’t think prices will go negative in the next year, year and half, but I don’t think we’ll see crazy (price) acceleration.”
‘Shocking’ rate hikes: As the Federal Reserve wages its battle on inflation, mortgage rates shot up from 3.76% in February of this year to 5.23% in May. It was “one of the most dramatic increases on record in such a short timeframe,” wrote Eskic in a blog post published Wednesday.
Historically, rising rates have led to “prices starting to moderate or even stall,” Eskic said. “However, Utah’s housing prices increased 24.4% between April 2021 and April 2022, all while rates increased from 3.06% to 4.98% in the same period.”
Eskic told the Deseret News in an interview he was “shocked” to see just how much of an impact that’s had on monthly mortgage payments Utah homebuyers are willing to lock themselves into in order to buy a home.
In that year period from April 2021 to April of this year, the median monthly mortgage payment skyrocketed by almost $1,000 from about $1,629 to $2,556 — a 56% jump.
And yet Utah homebuyers are still scrambling to buy, fueling a still highly competitive environment with homes flying off the market in a matter of days.
“What’s even more shocking,” Eskic wrote, “is that our median days on market is six days!”
Zero in on Utah’s most populated county, Salt Lake County, and homes in April were selling after only a median of five days, according to the Salt Lake Board of Realtors. The median price for all housing types in Salt Lake County was $550,000 in April, up 26% year over year.
Why is this happening? When the Federal Reserve slashed mortgage rates amid the throes of the COVID-19 pandemic, those low rates “masked” Utah’s steadily rising housing prices for some time, Eskic said.
While Utah home prices rose — to the tune of about $73,000 — homebuyers were still buying with relatively similar monthly mortgage rates from mid-2018 to the beginning of 2021.
“Since early in 2021, however, the monthly payment growth has outpaced the growth in prices,” Eskic wrote.
“So, what can we expect for housing prices going forward?”
Housing market forecast: Housing price forecasters currently predict national prices will increase 10.4% in 2022 and another 3.4% in 2023, Eskic wrote.
But there’s an important asterisk for Utah’s market.
Historically, Utah’s rate of home price growth “tends to be slightly higher than national figures. Therefore, we can assume our housing prices will follow this trend,” Eskic wrote.
So what would it take for prices to actually drop?
“Prolonged higher interest rates and pre-pandemic levels of inventory would create a scenario where prices slow, or dare I say, even decline,” Eskic wrote.
Let’s not forget Utah was struggling with a housing shortage even before the pandemic sent the national market into a frenzy. That housing shortage has only worsened — leaving homebuyers with a still tight inventory and, thus, a still highly competitive market.
“We have the high rates, but we don’t have the inventory,” Eskic wrote.
While high rates have led to a recent boost to inventory of active homes for sale, today’s inventory is still far below pre-pandemic levels.
“We’re in a better place with supply than we were even two months ago, there’s more to choose from,” Eskic said. “But we’re still like 49% below where we should be this time of year.”
Before the pandemic, 2.3 new home listings hit the market for every home sold, according to Eskic’s research. Since January of last year, however, only 0.7 new homes were listed for every one sale.
“For a balanced market, we need to get the sales to active listings ratio to a monthly range between 1.5 and 2.0,” Eskic said.
Why prices could cool: A couple of factors indicate home price hikes are about to decelerate. One is the obvious affordability issue, Eskic said.
“With the increase in interest rates and prices, close to 71% of Utah’s households are priced out of the median priced home,” he wrote.
That’s leading more sellers to stay in their homes longer, he said. Sure, the for sale dollar amount may be enticing, but where else would they live? Combine that with the spike in mortgage rates, and that’s also “adding to the inventory challenges,” Eskic said.
About 75% — 3 out of 4 — of Utah’s mortgages are below 4%, and 31% are below 3%, according to Eskic’s research.
Today’s higher rates are likely to de-incentivize would-be home sellers, especially those looking to upgrade, from putting their homes on the market because, again, if they were to buy somewhere else, they’d lose their low rate.
“Everybody’s just going to be stuck. People aren’t going to be selling their homes,” Eskic said.
Add that in with another inventory pressure point: Utah’s rapid population growth.
“Oh, and we are expecting another 248,539 households in Utah by 2030,” Eskic wrote, “but that’s a story for another day.”