Forecasting Inflation’s Potential Impact on Housing Prices

The previous two years have been quite eventful for real estate professionals involved in any type of property asset transaction. Let’s take a closer look at some of the key market dynamics—specifically the correlation between fluctuating interest rates and median home values—to hopefully gain a better understanding of how these variables will fluctuate in the coming months.

Interest rates steadily declined from 4.55% in August 2018, when the median home price came in at $388,400, to a new low of 2.67% in December 2020 at which point homes were then selling for an average of $401,700. The market was busier than ever as prospective homeowners sought to take advantage of the optimal mortgage rates. Over the course of 2021, a total of 15 million mortgage applications resulted in loan originations. Of these, 13.7 million were closed-end mortgage originations and 1 million were open-end line-of-credit originations per the CFPB.

Rates then rose slightly over the subsequent year, hitting 3.11% in December 2021, as the median home value similarly escalated to $457,300. According to data compiled by the Mortgage Bankers Association during this time period, the median balance for a first mortgage peaked at an all-time-high of $298,324—up substantially from $278,725 the previous year—which is the largest single-year increase in the history of the Mortgage Bankers Association’s annual report. Since the end of 2021, mortgage rates have experienced significant increases, rising from an average rate of 3.1% on a 30-year fixed mortgage to the current rate of 7.2% based on a market study conducted by Bankrate.

Did all the purchase and refinance transactions completed during 2021 have a collective negative impact on the housing market? We’re not talking about average home values falling off as that is certainly not the case. The main concerns is that overall activity within the housing market that the majority of trades rely on has started to decline. This overall rate of transactional movement within the real estate industry is what agents, lenders, appraisers, servicers, title agencies, inspectors, notaries, photographers and countless other professionals rely on in order to sustain business operations—and it has become increasingly volatile as of late.

The Federal Reserve has attempted to combat inflation by effectively making borrowing capital to fund real estate transactions inherently more costly. The intended consequence is to dissuade consumers, investors and businesses from completing purchases and investments with the aid of credit, which results in reduced overall levels of economic demand. The theory is that this will subsequently slow or even reverse the recent escalation of average home prices and rebalance supply and demand ratios. The concern is that because purchasing property is simply not an option for the majority of individuals, these inflated interest rates will dramatically impact potential homebuyers’ relative purchasing power.

Will the Federal Reserve’s actions have the intended effect of reigning in housing prices, or will it ironically result in the opposite scenario of property becoming more expensive than ever. As interest rates continue to rise, fewer homeowners will choose to upgrade their living situation, relocate to a more affordable geographic location or otherwise list their home for sale—which is exactly what is needed in order for the housing supply to meet the ongoing demand from buyers.As inventory levels around the country continue to be depleted, prices continue to skyrocket, and the marketplace becomes even more competitive for those looking to acquire a home.

Markets that saw explosive growth which outpaced even the most well-known rapidly expanding markets such as Phoenix, Boise, Las Vegas, and Austin (just to name a few) will see pricing settle to match the markets that had steady increases. These markets attracted a substantial amount of investors as they grew at unprecedented rates, and many of these individuals have listed these homes seeking to cash out while prices are still optimal. As the number of available homes subsequently increase in these markets, prices will decline steadily. According to Moody’s Analytics, Las Vegas and Phoenix are “overvalued” by 53.3% and 53.8%, while Greater New York is “overvalued” by just 7.4%. As investors shy away from these riskier markets, there will be less buyers available, and homes will quickly have to compete to sell. But this should see the opposite in safer markets with higher demand as investors begin to look for opportunity and compete with traditional home buyers.

What is behind the rising inventory levels in these select areas? In many major markets throughout the country, prices are falling although values remain constant. This is due to sellers continually looking to set the status quo for their local market by asking for more than the last sale. These homes that once were the subject of contentious bidding wars are now starting to see price reductions until they sell at a value at or near prior sales. Many of the homes that were listed on the market in the last several months are coming from potential sellers that consider this as their last chance to cash in on the days of overbidding by hungry buyers. As such, while inventory has increased, many of these markets have non-urgent owners that will only sell for their preferred price and are perfectly content letting the listing expire instead of settling for a lower value.

As buyers stay put in their primary homes with 2-3% interest rates and lower property taxes, we should see more 2nd loans and Home Equity Line of Credit (HELOC) loans. Owners will likely want to tap into their equity without impacting their low fixed first rate, since we will likely never see mortgage rates that low again in our lifetime. This could include funding construction to update their current home to have the utility to service their family for many years to come, or it might be simply to take money out of the home.

These reduced risk loans offer more flexibility, while allowing faster closings and a lower price. SettlementOne has introduced an entire line of valuation credit products geared at serving this market to complement our robust line of traditional products for conventional lending. These alternative loan products include Automated Valuation Methods (AVM), Interactive AVMs, Brokers Price Opinions (BPO), Hybrid Appraisals, Evaluations, PDR with ACE, and combination products. SettlementOne looks at this as an opportunity to give our clients more options and flexibility to win the business quickly. When you partner with SettlementOne, not only do you get our expertise, but you also receive a custom concierge service to guide you throughout the process. We pride ourselves on being a preferred partner with the solutions to be our clients’ go-to provider for all their valuation needs. Contact us today to learn more about how we can assist you with your next real estate project.