Mortgage rates are on an upward run in the first months of 2022, and homebuyers and sellers are getting nervous.

Homebuyers were presented with the question of whether the average 30-year fixed rate mortgage (FRM) rate rising above 3.5% will impact their plans to buy. Homebuyers responded with:

  • 47% who feel more urgency to buy;
  • 29% who feel the urge to look in other areas or seek smaller homes;
  • 14% who feel the need to slow their search and wait for interest rates to drop;
  • 7% who expect higher interest rates not to impact their plans to buy; and
  • 2% who expect to cancel their homebuying plans, according to Redfin.

Importantly, this Redfin survey was published in the first week of January 2022, just as mortgage interest rates had begun to inch higher. Since then, the average 30-year FRM rate has jumped from 3.2% to 3.9% as of February 25, 2022. Thus — if the survey accurately predicts real behavior — we ought to be seeing a significantly higher level of homebuyer urgency circulating in the housing market now.

While only 2% of respondents expected higher interest rates to cause them to cancel their buying plans, higher interest rates are pushing homeownership out of reach for many homebuyers. Buyer purchasing power revolves around a potential homebuyer’s capacity to buy property funded by mortgage money – this borrowing capacity is based on evolving factors, including:

  • homebuyer income;
  • savings; and
  • current mortgage interest rates.

Incomes and savings tend to change at a gradual rate. But as interest rates rise, buyer purchasing power — the mortgage amount a homebuyer is qualified to borrow — can decline quickly, dragging home prices down with it.

As it is, today’s rising rates are making it more difficult for homebuyers to compete with diminished purchasing power. But higher rates are also causing sellers to be quick on the trigger to put their homes on the market – wanting to get a good price for their house while the going is still good.

At this pace, expect falling prices to arrive by the second half of 2022.

Put a pin in purchasing

In case your buyer clients need reminding: now is not the ideal time to buy.

As interest rates continue to rise, home prices are expected to fall within months. Since any savvy homebuyer wants to avoid buying at the top of the market, it’s best to wait for these lower prices to arrive.

Inventory remains at a record low – forcing even more competition between buyers. Interest rates are up, and BPPI is lower. This means home prices will soon be on the decline – buying in 2022 practically guarantees the drawbacks at buying at the top of the market.

One of the biggest issues with buying at the top of the market is negative equity. Homebuyers who purchase a home before home values fall will end up owing more on their mortgage than the worth of the actual house. This makes selling without taking a loss impossible in the near term. Thus, today’s buyers will need to own their home for years before they are able to sell.

The housing market cannot experience a reliable recovery until all jobs lost during the 2020 recession return – this is not expected to occur until 2023-2024.

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