On Wednesday, Dec. 15, the Federal Reserve announced significant changes in monetary policy that will likely signal the last days of rock-bottom interest rates.
The Fed stopped calling inflation “transitory,” noting that the inflationary trend could last longer than initially expected. Inflation is rising at the fastest pace seen in nearly 40 years, with no indication that it will slow down. Because of this, the Federal Reserve indicated that it could begin stepping on the economic brakes soon.
“In light of inflation developments and the further improvement in the labor market, the Committee decided to reduce the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities,” the Fed noted. “Beginning in January, the Committee will increase its holdings of Treasury securities by at least $40 billion per month and of agency mortgage‑backed securities by at least $20 billion per month.”
The Fed also indicated that they could start raising rates as early as next spring, with officials projecting at least three rate hikes in 2022.
Interest rates had generally remained low since the 2008 financial crisis, but the COVID-19 pandemic brought it again to near zero since March 2020. Refinance activity reached near record highs, and the low rates also fueled the strong demand for housing. That will, however, likely chance once the rate hires start.
How Will Rising Interest Rates Affect the Housing Market?
The National Association of Realtors (NAR) recently released a study that surveyed more than 20 top economic and housing experts, asking them about their expectations for the housing market in 2022.
According to the survey, the experts predict that 2022 will bring rising interest rates, slowing inflation, and a housing market that will appreciate at a slower pace. Lawrence Yun, NAR’s chief economist, summed up the survey findings.
According to Yun, “Overall, survey participants believe we’ll see the housing market and broader economy normalize next year,” Yun said. “Though forecasted to rise 4%, inflation will decelerate after hefty gains in 2021, while home price increases are also expected to ease with an annual appreciation of less than 6%. Slowing price growth will partly be the consequence of interest rate hikes by the Federal Reserve.”
Yun predicts that mortgage rates will rise slightly, causing existing-home sales to decline to 5.9 million in 2022. Supply chain issues should relent a bit, resulting in 1.67 million housing starts, a modest yet encouraging increase from 2022.
What Should Homebuyers Expect?
In short, homebuyers should expect the following trends in 2022:
- Rising interest rates on mortgages will increase the debt burden of buyers, therefore reducing demand for home purchases.
- Home prices will rise in 2022, but reduced demand and more new construction will keep the upward trajectory slow compared to 2020 or 2021.
For those who have been considering refinancing, now is the time. With the low rates and home values at all-time highs, cash-out refinance could be an attractive option, especially for homeowners looking to take on major renovation projects. For prospective homebuyers who are in the process of searching, now is the time to lock in the rate.
