Do Inflation & higher mortgage rates cause a housing market crash? NO!
Mortgage Broker
Chris Carter
Published on February 17, 2022

Do Inflation & higher mortgage rates cause a housing market crash? NO!

With interest rates going up, will home price growth finally go down?

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It’s a fair question. And while it’s something home buyers desperately hope for after what we’ve seen over the past year, the answer isn’t totally black and white.

Rising mortgage rates impact the mechanics of the entire housing market. And that should be expected in 2022 with the Federal Reserve signaling upcoming rate hikes.

But while affordability could take a hit, buying a home may be an even smarter move given how inflation will push rent prices higher.

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How will home prices be affected?

To be clear, interest rates do not directly correlate with home prices, and vice versa. However, low rates stoke home buyer demand and higher demand leads to higher sales prices.

Housing prices won’t likely come down. However, equity growth, as averaged over 12 months won’t be as high as it has been in previous years.

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While not completely mirroring each other over the past five years (and mortgage rates, by nature, are more volatile), home values took off when interest rates cratered in 2020.

A similar pattern could unfold this year with mortgage rates expected to rise further and housing prices projected to grow at a lesser pace. Although, buyers should account for the lack of inventory keeping prices inflated.

Economically, as supply and demand come into line with one another (finally), we will see a normalization of the market but it’s not anticipated that housing prices will come down, they just won’t continue to grow exponentially as they have in the past year. In the short term as buyers look to find a property before higher rates impact them, we could actually see home prices driven higher.

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Where does affordability go from here?

As interest rates rise, affordability tends to decline because house hunters have less buying power.

However, affordability is relative and goes beyond just listing prices and mortgage rates. Home buying comes with additional advantages and a fixed–rate mortgage could be your best friend in the face of this year’s high inflation. Affordability is continually a comparison of renting v.s. buying. As rent continues to increase due to inflation, homeownership may still be the cheaper alternative.

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Is the housing market going to crash?

With such rapid and sustained price increases throughout 2021, people wonder if another bursting housing bubble could be on the horizon.

However, parallels drawn to the 2008 mortgage crisis aren’t accurate since underwriting standards tightened significantly since then. The current period of skyrocketing housing value gains has been driven by historically low for–sale supply combined with elevated demand.

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The pace of home price growth will likely slow this year but any kind of market crash scenario seems very unlikely and shouldn’t be counted on. Because of this, acting as soon as possible in your home buying or refinancing journey probably is the best way to spend less money.

When it comes to individual segments of potential home buyers, the middle and lower end of the socioeconomic paradigm will see the most impact and inverse reaction to increasing interest rates and home prices. It will have little–to–no impact on those within the higher end of the market.

I think we’re now going to start seeing individual markets potentially have some slowdown, even with extremely low inventory. But it’s not going to go the other way and crash.

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Nobody in history has seen mass migration to where you can work anywhere and live anywhere, as you now can in our new era. I really recommend people talk to real estate agents that live in that area.

Look at specifics, work with local lenders, local underwriters, local real estate agents, because they know the market best and they can give you a better understanding than somebody going off data from 10,000 feet.

Your next move?

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The climbing interest rate environment will impact every facet of the housing market. Of course, it’s important to remember that even if rates go above 4%, they’re still low from a historical perspective.

Whether you’re looking to buy or refi, checking your mortgage eligibility and reaching out to a LOCAL lender is usually the best way to get started.

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