A woman in a new home stands in the corner of a room with a glass of wine and resting back along a stack of moving boxes.

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Rising Rates May Spark Buying Spree

January 26, 2022

The fear of missing out, or “FOMO” as it’s called on social media, could prove to be a strong motivation for potential home buyers to enter the market quickly as mortgage rates rise. The potential loss of homebuying power may “supercharge the housing market ahead of the spring homebuying season,” says Mark Fleming, chief economist at First American Financial Corp., in a recent analysis.

The average 30-year fixed-rate mortgage has climbed by about 50 basis points in the first weeks of the year. Last week, rates averaged 3.56%, up from 2.77% a year ago, Freddie Mac reports.

The Federal Reserve has signaled an end to ultra-low rates, which observers expect to start climbing as soon as March. Mortgage rates tend to follow long-term bond yields, which also are expected to increase due to the Fed’s tightening of its monetary policy and its efforts to control inflation.

Economists foresee a 30-year fixed mortgage rate of 3.7% by the end of 2022, according to the National Association of REALTORS®. That still reflects a historically low rate but is well above what buyers have grown accustomed to in recent years.

“When mortgage rates increase, holding income constant, consumer house-buying power decreases,” Fleming says.

A scenario Fleming offers suggests that if the average mortgage rate stayed at its current level of about 3.5% through the spring homebuying season, assuming a 5% down payment and holding average household income constant at the November 2021 level of $69,800, homebuying power would fall by about $25,000. If rates increase to 3.7% by the end of 2022, however, homebuying power would drop by $36,000 compared to November 2021, while if mortgage rates reach 4%, homebuying power would fall by nearly $52,000.

“Rising mortgage rates impact affordability, but one of the root causes of rising mortgage rates is an improving economy, and an improving economy often leads to stronger wage growth,” he says. If incomes continue to increase at the current rate through the end of 2022, income growth could reduce the projected decline in homebuying power this year to a less severe $700 instead of $36,000, Fleming says.