Forecast: Higher Rates Will Curb Refinancing, But Not Home Buying

Earlier this month, we reported that rising mortgage rates, inflation, and home prices could cool the U.S. housing market during the second half of 2022. In fact, we’re starting to see some signs of that already, in the form of slowing home sales in many cities.

But a recent housing market and mortgage rate forecast from Freddie Mac offered a different outlook. Their researchers predicted that higher loan rates will cause a significant drop-off in mortgage refinancing activity during 2022, while home-buying activity will continue to chug along.

Big Jump in Mortgage Rates in Early 2022

Last week, the mortgage-buying corporation Freddie Mac reported that the average rate for a 30-year fixed home loan had risen to 5%. (The 30-year fixed is by far the most popular loan option among buyers.)

The 5% threshold is noteworthy for a couple of reasons. For one thing, that was the highest average for 30-year mortgages in the past ten years. It also marked a significant increase from the start of 2022, when the benchmark rate was averaging around 3.2%.

The chart below shows average 30-year home loan rates going back three years. Note the steep upward climb over on the far right, which represents the past few weeks.

Rate chart through April 2022
Chart: Average 30-year mortgage rates | Source: Freddie Mac PMMS

Rising interest rates could have a cooling effect on the U.S. housing market in 2022. But they’re not the only factor that could chill the real estate scene over the coming months. Higher home prices and general inflation could prevent many would-be buyers from making a purchase this year — or next.

Forecast: Housing Market Will Remain a ‘Bright Spot’

Despite any cooling that occurs due to rising costs, Freddie Mac’s economists expect the housing market to remain a bright spot for the U.S. economy.

They predicted a decline in mortgage refinancing activity, due to higher mortgage rates. And that’s something we are seeing already. Earlier today, the Mortgage Bankers Association stated that the recent uptick in borrowing costs caused the “refinance index to fall for the sixth consecutive week.”

That’s to be expected. Whenever mortgage rates rise significantly, refis tend to decline. But Freddie Mac’s latest housing market forecast suggests that home-buying activity will continue to chug along in 2022, despite the recent rise in loan rates.

According to Sam Khater, Freddie Mac’s chief economist:

“While the sharp increase in mortgage rates will lead to a precipitous drop in refinance originations in 2022, demand for housing continues to remain solid, propelled by the large swath of first-time homebuyers and prospective purchasers looking to lock in a mortgage rate before they increase further.”

It’s difficult to make long-range housing market forecasts in the best of times. And at times like these, with so much economic and geopolitical uncertainty hanging in the air, such predictions become all but impossible.

But one thing seems clear. The cost of buying a home will likely continue to climb in 2022.

Home Prices Still Rising in Most U.S. Cities

Freddie Mac’s economic research team also issued a revised forecast for home prices, extending through 2022 and into 2023.

Forecast snapshot April 2022

They expect house prices in the U.S. to rise by an average of 10.4% in 2022, following an actual gain of nearly 18% during 2021. Looking into 2023, the group predicts a more modest (and “normal”) increase of around 5%.

The company’s “forecast snapshot” graphic, shown on the right, was published on April 14.

Of course, such trends can vary from one local housing market to the next. The hottest real estate markets in the U.S. — those with the lowest supply and strongest demand — could see much bigger price growth through the rest of 2022. Metro areas like Austin, Boise and Miami come to mind.

The bottom line here: We don’t now how much higher mortgage rates will climb in 2022, but they certainly have room to rise further.

The 10-year Treasury yield is expected to continue rising over the next 12 months, according to a notable survey. And mortgage rates tend to follow these yields. “The higher 10-year Treasury yields go, the higher mortgage rates go as well,” according to Bankrate’s chief financial analyst Greg McBride.

It also seems likely that home values will continue moving north, largely due to an ongoing supply shortage within the housing market. Home buyers who are planning to buy a house in 2022 might want to consider expediting those plans, to avoid higher housing costs down the road.

Disclaimer: This article includes third-party forecasts relating to home prices, mortgage rates, and other housing-related trends. Such views are the equivalent of an educated guess and should be treated as such. The Home Buying Institute makes no claims about future economic or real estate conditions.