According to Bloomberg News, just when the homebuyers were thinking of taking a break from the boom in construction that triggered hopes of increasing supply, comes the increasing mortgage rates.
Uncertainty is looming due to surged mortgage rates
The fact that the mortgage rates have surged this year has brought uncertainty into a housing market that was already dysfunctional. With the lending costs being higher, housing will become less affordable, which should diminish the demand and slow down the increase in prices.
Almost a few weeks into 2022, there has been a steady increase in mortgage rates. An index that Bankrate.com has published shows rates up for 30-year fixed mortgage by whole percentage points since Christmas. A similar or an equivalent move like this was way back in the mid-2000s, sometime in the early summer of spring of 2013. For a homebuyer that puts in 20% as a down payment for a house that costs $350,000 and makes payment as per 3.2% mortgage rate, if it increases the rate to 4.2%, the monthly payment increases by almost 10%. Provided all other factors remain equal, that must lead to lower demand.
Bloomberg News reports that for a slowdown in higher mortgage rates to manifest it in the housing data is too early at this stage. Many home buyers are dealing with mortgage quotes that they had decided upon several weeks ago and must show all motivation to get a house at a rate that was earlier fixed and is at a much lower rate than the prevailing mortgage rate.
However, it is predicted that higher mortgage rates will be felt as April approaches. While most people will have their attention turned towards demand, the greater impact might be on the supply.
In comparison to the earlier rate shocks, this one has come at a very unusual time in the housing market in the United States. Equity levels in homes have risen at record highs and the homeowners that bought their homes at least one year ago have adequate equity in their property. Simultaneously, several homeowners have managed to refinance their homes into lower mortgage rates during the ongoing pandemic.
Bloomberg News reports that homebuilders have their problems. They face challenges related to the supply chain and now have to deal with higher rates when there is demand in the future. Due to the scarcity of certain products like doors of the garage, the construction process and the timeline have further lengthened, with some construction schedules getting delayed by a year. However, a home already under construction will get over, but the homebuilders have to give it a second thought when they plan to take up new projects later. A year’s delay is typically eternity, especially in a housing market that moves fast but is now crippled by the surging rates of interest, uncertainty in future construction, and high inflation prevailing.
