Federal Reserve Chair Jerome Powell told Congress earlier this month he favors upping rates in order to help rein in runaway inflation. In preparation of the first hike, which is expected today, financial markets are already pricing in higher mortgage rates. As of Friday, the average 30-year fixed mortgage rate sits at 3.85%—up from 3.11% in December.
Spiking mortgage rates should help to cool the red-hot housing market, right? Not so fast, predicts a report due out this week by Bank of America.
While higher mortgage rates would price out some buyers, Bank of America says it won’t be enough to stop the housing market from posting strong home price growth this year. Indeed, Bank of America predicts that U.S. Home prices will finish 2022 up 10%. That’s nearly double the average annual home price growth (4.6%) posted since 1989. However, it would be a bit of a deceleration: Between December 2020 and December 2021, the Case-Shiller U.S. National Home Price Index—the leading measurement of U.S. Home prices—jumped 18.8%.
Why the bullish 2022 outlook? While climbing mortgage rates could pour some cold water on the housing market over the long term, Bank of America says it could increase buyers’ urgency—as they rush to lock in rates—in the short term. Rising household incomes, favorable demographics, and “shifting preferences due to remote work” should also put upward pressure on price growth, writes Bank of America. That demand is something the supply side of the market—which is still hovering around four-decade lows for housing inventory—simply can’t handle.
“We currently expect 10% appreciation in Case-Shiller home prices this year, largely due to the historical supply/demand imbalance, though risks may be for high single digits,” writes Bank of America.
The good news for home shoppers? Next year could bring some relief. Bank of America predicts that U.S. Home prices will rise just 5% in 2023. That would put home price growth back into a normalized rate of appreciation and would likely result in fewer bidding wars.
But home sellers and buyers alike should take Bank of America’s forecast with a grain of salt. Over the past two years, real estate firms have struggled to pinpoint where the housing market was headed. At the onset of the pandemic in 2020, Zillow and CoreLogic both predicted that home prices would fall by spring 2021. Not only did prices not fall during the pandemic, they’ve gone on the hottest run in tabulated history.
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