Inflation keeping house prices high, even with rising mortgage rates

Market Trading EssentialsJanuary 22, 2022

2 minutes read

If you’re a homebuyer hoping for a break on home sale prices amid rising mortgage rates, it’s likely not happening this year, or next.

Aside from record-low inventory, a big culprit for even higher home prices points to inflation.

“It’ll [inflation] keep them positive. I don’t expect to see 18% in price appreciation. That’s a function of all the stimulus that was in the economy and the urge to move away from the virus,” Doug Duncan, chief economist at Fannie Mae told Yahoo Finance. “But we do expect house prices to be positive.”

Some homebuyers have been waiting on the sidelines hoping for a cool-off in the housing market. For over a year they were hearing that those rock-bottom mortgage rates were fueling massive demand, driving prices higher.

Now that the 30-year fixed mortgage rate for week ending Thursday rose to 3.56% from 3.45%, some homebuyers may be hoping a cool-off is around the corner. That’s an unlikely scenario, said Duncan.

“The history of the relationship between interest rates and house price is vastly misunderstood,” he said. Duncan.

“If you go back to the late 70s, early 80s, when the interest rates were 15% to 18%, house prices rose. House prices and interest rate are not correlated,” said Duncan. “What is correlated to interest rates is the number of homes sold.”

Even with low inventory, home sales were highest in 16 years in 2021.

“We forecast the sale of existing homes in 2022 to slow by only 3.2 percent from 2021, which would still represent the second fastest annual pace since 2006,” reads Fannie Mae’s latest research on the housing market.

With mortgage rates likely going higher from here, expect to see fewer first time homebuyers or those hoping to buy at a lower-price tier.

“We’re starting to see a drop-off in first time homebuyers,” said Duncan. “That will continue if interest rates rise and if house prices are still positive. Even if the pace of growth is slower, the fact is, prices are still going up.”

Fannie Mae predicts a rise of 7%-8% year over year in the cost of a house. The mortgage giant’s forecast is one of the more conservative outlooks. Goldman Sachs predicts a 16% year over year average price increase in housing for 2022.