April Market Report

April Market Report

Sellers and buyers are now wondering about the impact of rising mortgage rates on the housing market. There are a lot of big questions out there, and a lot of uncertainty about what happens next.

To provide some context based on historical data, I wanted to share what’s happened historically when mortgage rates were rising, so you can use the data and facts to create your own market opinion on what’s going to be happening.

No surprise, Mortgage rates are on the rise. This is data from Freddie Mac, and it goes back to the very beginning of this year when rates started out at 3.11% for the average 30 years fixed, and they have just steadily climbed since then, up to 4.67% at the end of March and now 5.25% as of April 26.

History can help us imagine where rates might level off. Looking at the last 30+ years the greatest interest rate increase (2.38%) took place over a 14-month period between 1993 and 1994. Four months ago interest rates reached a low point of 3.11% in December, 2021.?If you add the largest rate increase over the last 30 years (2.38%) to where we were at the low point (3.11%), you end up at a rate of 5.49%. Some experts say we could get as high as 6% but expectations are for the increases to slow over the course of 2022.

According to Freddie Mac, further interest rate increases this year will be more moderate. “Mortgage rates are likely to continue to move higher throughout the balance of 2022. Although the pace of rate increases is likely to moderate, much of the increase in rates in early 2022 is in anticipation of what will happen this year, especially with Federal Reserve interest rate policy.”

What Happens to Home Prices When Rates Rise?

Going back to October of 1993 there was an average of about 8% home price appreciation when mortgage rates rose by more than 1 percentage point. Rising rates have not had a negative impact on home prices.

You might ask then, what’s going to happen with home sales? Historically, when there rates increased more than 1%, it tended to reduce buyer activity and price some people out of the market.

However, today is a much different market than we have ever had with record low inventory of homes to sell and heavy buyer activity. There could be slower buyer activity, but probably not a dramatic. With inventory so low, home prices are projected to continue rising because there just aren’t enough homes for sale and the flood of buyers in the market likely aren’t going to go away anytime soon. ?

Looking at rising home prices and home sales, we are also seeing plenty of buyers in the market who can’t find a home to buy. Keep in mind that when you see headlines about a drop in home sales at any point right now, it’s not because of rising mortgage rates. It’s because there aren’t enough homes to buy. ?

In Nashville today, there is 1 month of Inventory. This is believed to be the driver that’s going to propel us forward when we look at what could happen in the market, with home price appreciation as well.

National Association of Realtors is saying. “While higher short term interest rates will push up mortgage rates, I expect some of this impact to be mitigated eventually through lower inflation. Thus, I expect the 30-year fixed mortgage rate to continue to rise, although we aren’t likely to see big jumps that occurred over the past few weeks.” This means that inflation is driving this increase in mortgage rates, which are expected to continue to rise. But it won’t be at as quite a rapid pace as what we’ve seen over the past few weeks.

Nashville Population Expected to Increase

The CEO of the Nashville Chamber of Commerce, Ralph Schulz, has said he expects, “200,000 people to be moving to Nashville over the next 5 years.” Even with interest rates increasing, we expect there to be plenty of demand and home appreciation in the foreseeable future.

As this is being written, its a day after Easter, so let’s talk about the spring housing market. Mike Simonsen from Altos Research said this. “We keep watching for it, but there are absolutely no signs of market slowdown anywhere in the data. If anything, we’re seeing the market continue to heat up.” And no doubt we’re in a very, very busy market. Have been in one for the last couple of years, all through the time we were in COVID. All through last year and certainly coming into this year. Many were saying okay, maybe the market’s starting to moderate, but we’re seeing a very, very busy market right now.

Fortune is now saying more industry insiders are throwing out their previous forecast and replacing them with more bullish short term looks. Indeed, some experts say the 2022 spring housing market might go down as one of the most competitive on record.

This is a look at showings as measured by Showing Time. Showings exceed where we were during the pandemic. Any lack of existing home sales is not because there’s not demand in the market. There’s very much a strong, strong demand in the market. It’s because of the lack of available homes, which is pushing the upward pressure on prices.

This graphic shows active listings as compared to new listings going back to August of 2021. The blue are active listings each month, and the green are new listings that are taken during the month. Active listings outpace the new listings until March, where new listings outpace the active listings.

What does that mean? It shows a great picture of what’s happening in real estate today. As soon as something comes on the market, it sells.

Why is Inventory Staying so Low?

Part of the story is connected to single-family housing units being completed and why it’s so hard to find a home right now. The simple answer is for 14 straight years, we’ve been below the 50-year average in home builds in this country, going all the way back to the 70s.

Builders were hit extremely hard during the housing crisis in 2008 and are now slowly building back their capacity to bring new builds to market. There is no doubt that the lack of available homes coming to market, has constricted supply. A lot of people want to buy, driving the price up, making it hard to find a home.

The other issue that is going to be a big concern for a lot of consumers this spring is inflation. This is a picture of home ownership as a hedge against inflation. When you’re in an inflationary economy, you want to be invested in hard assets that outperform inflation. And this is going back all the way to the 70s. The blue bar there being the inflation rate. The green bar being home price appreciation. And you see most decades, home price appreciation has outperformed inflation.

We know there was something going on in the 2000s with the housing crisis. But for many of those decades, housing has well outperformed inflation. Something to keep in mind as people are concerned about inflation.

Many people are asking, should I buy right now? Is this the top of the market?

This graph shows the potential growth in household wealth over the next five years based solely on increased home equity if you purchased an average priced home, about a $360,000 home, in January of this year.

In summary, as we consider all the facts and figures of the past and present, we are very likely heading into continued home appreciation (and equity building), additional moderate rate increases, heavy buyer demand, a slowdown in home sales due to lack of supply, and ongoing inflation. Real estate remains a solid investment strategy as a hedge against inflation and as a primary avenue to build wealth.?

I hope all of this finds you well. We’re grateful for everybody that invests time in the Monthly Market Report, to be the knowledge broker for the clients they serve. We’re grateful for you, grateful for your faith in what we do. We hope all this information is useful. We want you to know the truth about the housing market by giving you the statistics and then let you determine what the right course of action is for you.?

Patrick Pruett

Berkshire Hathaway HomeServices, Woodmont Realty