The housing market enters uncharted waters

March 22, 2022, 10:55 AM UTC

Fed Chair Jerome Powell is done sitting idly on the sidelines as inflation burns away Americans’ purchasing power. The plan? Draw upon the central bank’s decades-old inflation playbook by increasing rates until demand pulls back and price growth slows.

This is already presenting a test for runaway inflation’s poster child: the U.S. housing market. Even before the Federal Reserve issued its first rate hike last week, financial markets were pricing in higher mortgage rates. Back in December, the average 30-year fixed mortgage rate stood at 3.11%. Now that rate is up to 4.16%.

Of course, spiking mortgage rates means home shoppers—who have already watched as U.S. home prices have soared 18.8% over the past year—will have to pony up even more if they want to buy. A borrower on a $500,000 mortgage at a 3.11% fixed rate would have faced a $2,138 monthly payment. Now, at a 4.16% rate, that soars to $2,433. That’s an additional $106,400 over the course of the 30-year mortgage. Not to mention that as rates rise, some borrowers (who must meet banks’ strict debt-to-income ratios) will lose their mortgage eligibility.

In theory, rising mortgage rates should take some steam out of the historically hot housing market. However, real estate experts say we’re in a bit of uncharted waters: Some forecast models predict the housing boom will continue well into 2023, while others forecast that spiking rates will cause significant cooling in the market.

Zillow, in particular, remains firmly on the bullish side. The home-listing site is predicting that the year-over-year rate of home price growth will accelerate to a record 22% by May. Beyond this spring, Zillow predicts only a slight slowdown in the rate of growth. By January 2023, Zillow forecasts that year-over-year home price growth will be at 17.3%—or nearly four times above the average annual uptick (4.6%) posted since 1989.

How could the housing market maintain its explosive growth in the face of spiking mortgage rates? Nik Shah, CEO of Home.LLC, a startup that provides down payment assistance to homebuyers in return for a share of any profits, points to demographics. As Fortune has explained before, we’re still inside the five-year window (between 2019 and 2023) when every millennial born in the generation’s five largest birth years (between 1989 and 1993) will hit the all-important first-home buying age of 30. Under-building in the decade following the 2008 housing crash means there isn’t enough supply to match that cohort’s demand. Even if higher rates price out some buyers, Shah says, it wouldn’t be enough to alleviate the underlying supply and demand mismatch.

But not everyone agrees with Zillow’s bullish outlook. Look no further than CoreLogic, a real estate research company, which predicts the housing market is about to undergo some serious cooling. Between January 2022 and January 2023, CoreLogic expects U.S. home prices to rise just 3.5%. If CoreLogic is right, it would mean 2022 will go down as a below-average year for home price growth.

Why is CoreLogic’s model relatively bearish? Unlike Zillow, it predicts a greater pullback on the demand side. The sting of soaring home price growth during the pandemic was lessened, to a degree, by record low mortgage rates. Now that rates are returning to pre-pandemic levels, buyers will feel the full punch of record prices. That could finally create some pushback on the part of home shoppers.

“The rise in mortgage rates since January further eroded buyer affordability and is expected to slow price gains in coming months,” writes Frank Nothaft, chief economist at CoreLogic.

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