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Housing market 2022: how will rising interest rates affect prices?

The Federal Reserve is expected to raise interest rates this week – likely by 0.25% – for the first time in three years, in hopes of containing soaring inflation.

As a result, mortgage rates will also rise. So what will this mean for the housing market?

In the West, especially for high-demand states like Utah, it’s not good.

“It’s bad,” said Dejan Eskic, senior fellow at the University of Utah’s Kem C. Gardner Policy Institute, who specializes in housing research.

While the nation’s average 30-year fixed mortgage rate has edged closer to 4%, 67% of Utah households are “locked out” of the state’s median price home, according to Eskic’s calculations.

The median priced single-family home in Utah was $512,000 statewide in the fourth quarter of 2021, according to the National Association of Realtors.

“A full two-thirds of Utah can’t afford the median-priced home anywhere because of how quickly rates have gone up over the past two months,” Eskic said.

The average 30-year fixed mortgage rate in the United States hit a record low of 2.65% in January 2021, but has jumped to 3.85% in the past three months.

If interest rates rise even further, approaching 4.5% or 5%, that percentage of Utahns who can’t afford the median-priced home could jump even closer to 70%, Eskic said.

“If you had to wait to buy in the spring, you’re probably out of luck,” Eskic said, as rising interest rates push even more homes out of reach with higher monthly loan payments.

Wait, shouldn’t higher interest rates help lower demand?

Utah’s housing problem continues to be a supply and demand issue. Shouldn’t the rise in interest rates therefore help to curb demand?

Not in today’s market, Eskic said.

Rising interest rates will slow demand, he said, but not “enough to completely slow the market because there is nothing to buy.”

Low inventory remains a big problem that is sending home prices skyrocketing.

“Typically when we see rates go up, we see a slowdown in demand. We are seeing a slowdown in prices. Sometimes the price actually goes down,” Eskic said, like when they did from mid-2018 to January 2019. Then rates hit nearly 5% and the state saw its median sale price go from $310,000 to $301,000.

But in today’s market? Don’t expect to see prices drop, he said.

“Over the past two months, rates have gone up dramatically, and we haven’t seen anything like it,” he said. “We don’t see any indication of (price) falling because stocks are so low.”

“In a normal environment,” or if the housing market was the same as it was in 2019, Eskic said interest rate hikes would cause prices to “decelerate.”

But Utah’s 2022 market is far from normal.

“The inventory is so low it’s non-existent,” he said, noting that at this time of year UtahRealEstate.com would typically have between 7,000 and 9,000 active homes for sale. “And right now, we probably have 2,000.”

“Because of that, we’re still expecting to see some pretty healthy price increases,” he said.

Even with so many Utahns sold out, Eskic said there are plenty of buyers still driving demand up, many of whom have migrated to Utah.

“It’s those two factors,” he said, “low inventory and immigration.”

The COVID-19 pandemic has upended housing markets across the country as thousands of Americans reassessed their lives and left big cities in search of more space at lower prices. Many looked west, especially to states like Utah, where jobs were booming, and Idaho, where housing was relatively affordable.

As a result, states like Utah and Idaho had record years for home sales and price increases. In Utah, experts have warned of a “severely unbalanced” housing market as demand continues to dramatically outpace supply.

But it’s not just the pandemic’s fault. This has only worsened and accelerated the housing problem in Utah. The housing shortage in the West began years ago in the midst of the Great Recession, after the subprime mortgage crisis sent the national and global economy into a death spiral. After the crash, homebuilding contracted and the market has struggled to keep up with demand ever since.

Will higher interest rates lower prices?

Higher interest rates may slow price increases, Eskic said, but it won’t stop them.

It will only lift what Eskic called a “mask” that has essentially hidden or softened the impact on homebuyers’ monthly payments.

In 2021, Utah home prices rose 27% statewide, breaking the 20.1% record set in 1978, set 43 years ago, according to the Salt Lake Lake Board of Realtors.

Unfortunately, in 2022 there isn’t a lot of good news for potential buyers. Prices are expected to rise further thanks to low inventories – but the good news is that they will only rise by perhaps 10%, Eskic said, instead of more than 20%.

This slice of good news rings hollow, however, when prices reach record highs.

“It will only slow the acceleration,” Eskic said. “That won’t stop him.”

So in 2022, “we’re still in a sore housing market,” he said, and he doesn’t see relief until “later in the decade, unfortunately,” when aging Utahns decide to trade in their large batches against “simplified”. », smaller batches.

For aspiring homebuyers who have been waiting, hoping prices might come down — hoping the bubble will burst like it did in 2008 — Eskic said there’s no indication the wait will lead to lower prices. price.

Even though prices are painful today, if it makes sense for you and your family, Eskic advised pulling the trigger now rather than waiting.

“It will be much cheaper to buy now,” he said, “than it will be two or three years from now.”

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Mary Cashion

The author Mary Cashion