More Good News for Homeowners | Rising Interest Rates are not Expected to Negatively Impact Home Price Growth in 2022
Residential Housing Supply-Demand Imbalances Continue to Favor the Seller
It’s undeniable 2021 was the year that single-family homeowners crushed the Massachusetts real estate market in terms of home price growth (see Exhibit 1).
Low inventories and unprecedented housing demand led many buyers to a) endure long lines at open houses, b) waive traditional contingencies (i.e., inspection and/or mortgage) and c) submit offers in excess of the seller’s asking price in order to have their offer accepted. Note all this was happening when inflation and mortgage rates were at relatively low and stable levels. In effect, this was the “new normal.”
In 2022, however, things started to change (See Exhibit 2). In January, the Bureau of Labor statistics announced that inflation, as measured by the 12-month change in the consumer price index (CPI), reached 7% in Dec-2021, a level not seen since June of 1982. Folks, that’s nearly 40 years ago and 3.2 times higher than the 20-year average of 2.2%.
Similarly, mortgage rates (see Exhibit 3) in the first three weeks of January rose 
forty-five basis points (almost a half a percentage point) following the Federal Reserve’s announcement that it plans to aggressively fight inflation via. a series of interest rate hikes and a reduction/halt in its asset purchase (stimulus) program.
So, what does this mean for those of us who own homes? How will higher inflation and rising mortgage rates impact home prices, contract terms and buyer demand? Let’s begin by looking at the supply-side of the equation.
Inventory Shortages | Outlook and Analysis
On the supply-side, there are two factors that primarily affect single-family home inventories: new housing starts and the number of homes up for resale.
As respects the former, it is highly unlikely that new housing starts in 2022 will meaningfully narrow the current supply-demand imbalance that fueled home price growth in 2021. This is because macroeconomic factors (i.e., inflation, labor shortages and other supply chain constraints) are creating uncertainty around construction costs which makes these types of investments more expensive and potentially less attractive for investors.
Similarly, the number of single-family homes up for resale in 2022, albeit expected to increase YOY, probably will not meaningfully narrow the current supply-demand imbalance. The challenge for likely and willing sellers (e.g., empty nesters, retirees) is the same that all buyers face: finding and buying a replacement home. Interestingly, these homeowners not only want to sell their home but probably need to sell given that home costs (i.e., property taxes, maintenance, etc.) will increase with inflation.
In total, new housing starts and resales are unlikely to meaningfully change the current supply-demand imbalance for single-family homes in 2022. Agents and homeowners alike should expect another busy if not frenetic home selling season this spring unless of course something materially changes on the home buyer (demand) side.
Excess Buyer Demand | Outlook and Analysis
For home buyers, the key issue in 2022 is affordability. In other words, how much house can I afford, and will I qualify for a mortgage loan?
Unfortunately, for some buyers, the answer to that question may be different from the answer they received in 2021 as both inflation and mortgage rates are both on the rise.
As respects the former, inflation usually increases real estate prices as higher construction costs and the ability to charge higher rents raises home values (new and resale). This is obviously unwelcome news for home buyers as it just got more expensive for them to purchase a home.
In terms of mortgage rates, most home buyers are unable to purchase their dream home with cash. That means they have to secure a mortgage loan from a bank to make up the difference between the home purchase price and their down payment.
That difference (i.e., loan amount), however, is likely to increase as the gap between the buyer’s down payment and the home purchase price widens as a result of inflation and home supply issues. This of course will increase the buyer’s borrowing costs which will effectively price some buyers out of the market. In other words, their mortgage application will get rejected because they cannot afford it
The question we don’t know the answer to is how many buyers will exit the market because of this increase in borrowing costs. If it’s a substantial number, then it could have a mitigating effect on the growth of home prices. In the short-term, however, we don’t expect home price growth to turn negative as home supply issues continue to outweigh any potential disruption that a rise in interest rates and inflation could have on the ability and willingness of home buyers to purchase homes in 2022.
And the Answer is...
In conclusion, we don’t expect the rise in interest rates and inflation to have a materially negative impact on home prices in 2022. Just the opposite, we expect 2022 to be another record year for home price growth. We do, however, acknowledge that home pricing will eventually come under pressure as the pool of eligible buyers narrows due to affordability issues caused by rising inflation and mortgage rates. This is more of a long-term issue and a topic we will continue to report on in future newsletters. In the meantime, if you are a homeowner who is thinking about selling your home, give us a call so we can help you make the right decision with respect to the sale of your largest and most important investment (i.e., your home).
Team Coyle
Team Coyle (Matt & Ying) is a top-ranked real estate team at Compass with more than ten years of experience helping individuals and families buy and sell real estate in Massachusetts (primarily in the Metro West region).