Will rising mortgage rates help cool the housing market?

March 10, 2022 - 3 min read

Could rising interest rates actually help home buyers?

Since mortgage rates bottomed out in 2020, the housing market has been embroiled in fierce competition and skyrocketing home prices.

For-sale listings evaporated, with the limited supply driving multiple offers above asking and many of them all-cash.

Times are tough for the average buyer, especially first-timers. Now, they no longer have the benefit of locking in the lowest mortgage rates on record and face forecasts of long-term growth.

But while rising rates can hurt affordability, will they also help buyers by reducing demand?

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Will home price growth ever come down?

If you’re tired of the staggering pace of home price growth, you’re not alone.

Housing values are expected to gradually slow down as 2022 progresses. Though early returns haven’t gone in that direction. Annual appreciation surged 19.1% in January, according to CoreLogic’s Home Price Index — the highest level of growth in at least 45 years.

“The rise in mortgage rates since January... is expected to slow price gains in coming months.”

-Frank Nothaft, chief economist at CoreLogic

The data provider projects Jan. 2022 to be the peak for the current price boom, with the annual rate of change dissipating and eventually getting back to single-digits by August.

Comparatively, Jan. 2021 had an annual growth rate of 9.4% and CoreLogic forecasts Jan. 2023 to slow down to 3.8%.

“Buyers have continued to bid prices up for the limited supply on the market,” said Frank Nothaft, chief economist at CoreLogic. “However, the rise in mortgage rates since January further eroded buyer affordability and is expected to slow price gains in coming months.”

The double-edged sword of increasing mortgage rates

As interest rates rise, they reduce affordability. While that makes home purchasing more difficult, it can also lead to fewer buyers in the marketplace. With lower demand, less upward pressure gets put on prices.

“What goes up, must eventually moderate,” said Mark Fleming, chief economist at First American. “Rising rates may be a housing market headwind in 2022, but as some buyers pull back from the market due to affordability and supply constraints and as new construction adds more supply, house prices will moderate, resulting in a more balanced housing market.”

“Rising mortgage rates may be a housing market headwind in 2022, but... house prices will moderate, resulting in a more balanced market”

-Mark Fleming, chief economist at First American

As far as new construction goes, residential building permits totaled a seasonally adjusted annual rate of 1.899 million in January, according to the Census Bureau. This increased from December’s rate of 1.885 million and Jan. 2021’s rate of 1.883 million.

Meanwhile, a seasonally adjusted rate of 1.638 million properties started construction in January, down from 1.708 million in December but up from 1.625 million the year prior. Increased for-sale inventory will be a major key to reduced home price growth.

The importance of inventory

Rising interest rates will likely take some buyers out of the running and reduce demand. However, unlocking inventory would be a bigger factor in slowing the pace of home price growth.

The real estate market’s defined equilibrium is a six-month supply of homes for sale. When it goes above that mark, the options are plentiful and it becomes a buyer’s market. Anything below is more beneficial to sellers. January inventory measured 1.6 months, according to the National Association of Realtors.

“Clearly, right now, we are well below a level of balance. Even an increase to three months’ supply would slow down appreciation,” Fleming said.

“Since the vast majority of the supply of homes for sale are existing homes and not new, slowing appreciation will be dependent on that supply increasing. We do expect more inventory to arrive as the spring home buying season kicks in, but whether it will be enough remains to be seen” he continued.

Ready to buy?

Of course, those fortunate enough to make a winning bid and purchase a home get to enjoy the elevated inflation and property values increasing their equity.

And while the current landscape is challenging to navigate, “it’s never a bad time to buy” if you can afford to.

Check your eligibility, the latest interest rates and which type of mortgage is right for you.

Time to make a move? Let us find the right mortgage for you

Paul Centopani
Authored By: Paul Centopani
The Mortgage Reports Editor
Paul Centopani is a writer and editor who started covering the lending and housing markets in 2018. Previous to joining The Mortgage Reports, he was a reporter for National Mortgage News. Paul grew up in Connecticut, graduated from Binghamton University and now lives in Chicago after a decade in New York and the D.C. area.