Why we “desperately need” higher mortgage rates: Expert Q&A

April 27, 2022 - 6 min read

The interest rate conundrum

First, mortgage rates dropped to all-time lows in 2020 and turned the already-tight housing market into a feeding frenzy. Then in 2022, rates skyrocketed to keep up with inflation and reduced affordability pushed some buyers to the sidelines.

However, rising mortgage rates are actually the best thing to help buyers and bring balance back to the market, according to Logan Mohtashami.

We recently spoke with the lead analyst at HousingWire and former loan manager on how high he thinks rates will climb, how the market is like Hungry Hungry Hippos and why any talk of a housing crash is ridiculous.

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Meet the expert

Logan Mohtashami is a data analyst and financial writer covering the U.S. economy with a specialization in the housing market. He’s worked in lending and housing since 1996 and is currently the lead analyst for HousingWire.

Mohtashami shared his thoughts on how the rising mortgage rate environment will impact the overall real estate sector in a Q&A with The Mortgage Reports. Answers have been edited for brevity and clarity:

How high will 30-year mortgage rates go in 2022?

The 10-year Treasury yield isn’t back to the highs that we saw in 2018, but mortgage rates are higher. I think that’s the big gap and the mortgage market is showing stress in pricing.

That mostly means if the market stabilizes, [mortgage rates] shouldn’t really go above 6% or, really, above 5.875%. If growth and inflation pick up even more, that would change the dynamics of what the bond market is doing.

But there’s a lot of short term issues that the world is dealing with that eventually in time should alleviate: inflationary pressures, the Russian invasion, and the Federal Reserve got much more aggressive as well.

The market has priced in a lot of what the Fed wants. The question is, can economic growth stay strong enough to warrant these rates and yields? I think that’s the battle for the rest of the year.

Do you have any prediction on how soon rates might stop rising and level out?

We’re playing a tug of war right now on how much higher rates and inflation can go. Typically, new home sales and housing starts fall before every recession. Mortgage rates getting higher is going to be problematic for the builders, and we already see in the survey data that they’re mindful of it.

We’ll see in the second half of 2022, because some of the frontline data is starting to get weaker and inflationary pressures are starting to ease up a bit. There’s limits to what the U.S. economy can do.

If there was no Russian invasion, no Shanghai shutdown, it would be a much cleaner picture right now. So it’s not as clear-cut on what the Federal Reserve does — but it knows it’d be difficult to raise rates in a recession, no matter what the inflationary data is.

Do you think these higher rates will cool the market?

Higher rates are desperately what we need because the home price growth we’re seeing is so savagely unhealthy. We have to find ways to create a slowdown and higher rates is the best way.

Traditionally, two things happen with higher rates: The days on market grow. We’re still in the teen days on market and that’s too fast. And second, the growth rate of pricing falls.

Sales should trend lower in the existing home sales market. The new home sale market is more problematic with higher rates, especially with all the backlog of completions. Some of these homes are actually sitting there without a rate lock. Now the buyer needs to qualify at 5% so people should look for cancellation rates on new home sales.

Traditionally, two things happen with higher rates. The days on market grow [and] the growth rate of pricing falls”

We’re going to hopefully see a cooldown in housing activity. The question becomes how much will inventory increase? Inventory is very seasonal and I do believe as long as rates stay at this level, we should finally get some positive year-over-year inventory in 2022. What would be bad for housing is if mortgage rates fall back down and whatever inventory gets created, we gobble back up.

The sub-4% mortgage rates have given us 35-to-40% cumulative home price growth in three years. It’s the worst post-2010 housing market I’ve seen simply because of the raw shortage of homes. That’s not what you want to see.

How do you see rates and demand moving in 2023 and beyond?

So 2023… I’ve always talked about years 2020 to 2024 as having the best housing demographic patch in history with the biggest group of 28-to-34 year-olds ever at 32.5 million. It should have at least 6.2 million total new and existing home sales, and that should be a given.

The question is, where’s the balance? Because if rates come back lower, that’ll benefit demand. If rates stay up here and inventory just slowly rises, that’s not going to accomplish much. People need to have choices and wages need to pick up if rates are gonna stay higher.

Home prices grew way too fast in this two and a half year period because there’s too many people looking at too few homes. Then rates also rose fast so housing demand should fade. Hopefully over time, demand slows down and sellers become more realistic about their home price.

Is there a housing bubble brewing in 2022, like the Federal Reserve of Dallas said?

I read the Dallas piece and loved it. They’re much calmer about the housing market than I am but they talk about the same things, like how there’s no excess leverage. Anybody who says housing is going to crash has to pick a point to where the bubble started and the prices have to go back there in a very fast time.

The reason I’m not a housing bubble crash person is there’s just not enough product and there’s too many people looking. That’s the difference between this and let’s say from 2002 to 2005, where there was too much credit going around.

“It’s impossible for me to say ‘housing is a bubble’ because at least 8 to 10 million people… would need to willfully sell their homes at a major discount”

In 2008, credit got worse in America, which means people were filing for foreclosures and bankruptcies. Then, the job loss recession happened on top of that.

It’s impossible for me to say, ‘housing is a bubble,’ because at least 8 to 10 million people making over $100,000 would need to willfully sell their homes at a major discount. There’s nothing in the data showing that to be the case. That’s why the credit stress from 2005-2008 is really an important story. That’s not the case now.

I just threw the towel on the market because we lost sanity. One house here in Los Angeles had 125 people looking at it. Higher rates need to put home sellers and home builders on their ass because their pricing power is too strong. That’s why I like higher mortgage rates to create balance, more inventory, higher days on market, and get people back to reality.

What we’ve seen this year is like Hungry Hungry Hippos with only one or two balls out there. You’re forced to bid on a home now, where you were forced to sell your home after the housing bubble crash. Two different marketplaces, both are extremely unhealthy.

What advice would you give to home buyers right now?

I always say that if you’re asking someone else if you should buy a home, you’re not ready. Follow your own gut. There’ll be a time in your life that you’ll be good to go.

The bottom line

Today’s housing market is tough for buyers — especially first-timers. But the rising interest rate environment could be the best thing and help harness the exorbitant home price growth of the past two years.

As always, preparation is your friend and getting pre-approved for a loan will jumpstart your process.

If you’re ready to buy (or even just thinking about it), reach out to a lender to figure out your next steps and what you can be approved for.

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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.