Why are home prices and interest rate on a rise for 2022?

Mortgage Rates and Home prices are going UP UP UP. You probably noticed that home prices have been on the rise and interest rate are following since January of 2022, But you may not know why. Hi I’m Racheli Refael a mortgage advisor here in Sunny South Florida. Let me go over 5 reasons why this is happening and what you can do to prepare. The unfortunate thing is that all those forces  are happening all at the same time like The perfect Storm.

1. Artificially low interest rates
2. 10 years of slow new home constructions
3. The delays in the supply chains to build homes. Higher building costs due to the higher demand.
4. The millennials population segment is growing.
5. The good old fear of missing out FOMO

Please allow me to put everything in perspective. Before 2008 crash the growth in home building were due to the crazy loan programs.

You can see in this graph how home prices rose up all the way to 2006 and then the slowdown with the bottom in 2012. Since 2012 we see a steady growth in home prices all the way to 2020 and then boom – a big hike in home prices. In 2020 what hit the world? yes COVID Everything was shut down remember? The Federal reserve had to step in and take measures to save the economy from a “who knows where it could end recession” Reason number 1 why home prices have been rising- since Covid we had artificially low interest rates. Since January 2022 we have rising mortgage rates The FED started buying Mortgage-Backed-Securities known as MBS in huge quantities. Mortgage-backed securities is a financial instrument that affect mortgage rates.

You can see in this chart how mortgages bottomed out in 2020 all the way through 2021, rates were in the mid 2% to  low 3’s. In normal circumstances this would not have happened that way. Many home buyers enjoyed those low rates and got a piece of the American dream owning their own home.  Many homeowners refinanced their mortgages and enjoyed much lower payments. The demand for homes grew exponentially. That brings us to reason number 2 for the rise in home prices- 10 years of slow new home constructions So many more people wanted to buy but there were not enough homes available I e. low inventory, the demand was much bigger than the supply so prices started rising quickly. If you recall after 2008 crash many builder just threw the towel and got out of building homes.

In this chart it is obvious. This valley in number of homes being built hit rock bottom in 2010. To this day number of homes being built has not fully recovered to the tip we saw in 2008. So low rates –> everyone wants a piece of this “cake” and not enough homes caused the home prices to keep rising.. You can see in this graph how the number of houses for sale plummeted.

This leads us to reason number 3 – The delays in the supply chains to build homes. Higher building costs due to the higher demand The supply chain for materials to build new homes has been slowed down tremendously during Covid. As the homes that were getting billed need more appliances, more tiles, more doors, more building materials etc. All those forces increased the time it takes to build a home, hence even the double whammy. We have less homes ready and available to be delivered to home buyers.

Take a look at this graph and see the increase in building materials costs. If it costs so much more to build a home it will cost that much more plus to buy a home. The Federal reserve  printed more and more money to encourage spending and steer the economy out of a recession during Covid. I’m sure you’ll remember that money was spread all over in the trillions of dollars.

Look at the chart – the correlation between the money supplies and the home prices is almost identical. Look the FED had to do what it had to do. For the most part it was positive but unfortunately it had some side effects. In addition to the first 3 reasons the 4th reason is the increase of the millennial population turning 30 and looking to get into home ownership, this would have happened anyway however it was on top of everything else.

Take a look at this chart in blue the millennial segment of the population is widening – growing. That brings us now to the 5th reason. the good old Fear Of Missing Out FOMO. It’s a psychological phenomenal when people see a frenzy or a party they want to be a part of it and many “jumped in”. So now what do we do? How would the exponential rise in interest rate will affect the home prices? What I’m about to say is my opinion and my opinion only. At the end of the year when the Federal reserve started to hint that they will reduce drastically buying mortgage-backed securities the market reacted in hope to offset the ramification. However, that pushed the 10-year bond to be skyrocketing from December of 2021 all the way to today April 2022. And because of that mortgage rates rose from the high 2’s to the mid-5’s. Yes they almost doubled in a matter of 4 months. If I had a client who was approved to get a mortgage at $400,000 in December today they can only qualify for $320,000 loan. But what happened to home prices they’re still going up because the demand is still very strong. In Florida because of the influx of people moving from States that were not as free as we are here in Florida keeps the demand for homes at a high level. I do believe that the home prices have a good chance to slow down somewhat in the next few months. If you have some questions please drop me a line at AskRacheli.com Looking forward to helping you find your way home.