The end of the housing boom will come with an increase in mortgage rates in 2022



The current housing boom will end in 2022 – or possibly early 2023 – when mortgage interest rates rise. There is no bubble to burst, although prices may retreat from panic highs.

The boom has resulted in frantic buying, bids exceeding asking prices, and great concern among would-be homeowners. But it was not a bubble. A bubble is not just a rise in prices, but a demand that is not justified by fundamental economic factors. The key to the buying boom has been low mortgage rates plus changes in the type of housing you want.

Mortgage rates hit a record low of four percent in 2011 and then remained in the area until the pandemic when they hit three percent. The 2020 mortgage rate cut lowered the monthly home payment by 12 percent, allowing many people to buy homes now rather than later.

Aside from low mortgage rates, some people saw the future of telecommuting and wanted more space, which often means moving from apartment to single-family home. Others found city life less exciting, so they headed to the suburbs, where houses are more common than apartments.

Increased demand for houses has predictably led to higher prices. However, supply could not change as quickly as demand. Builders ramped up production in the second half of 2020, but faced supply constraints a few months later. All plots ready for construction were bought up, labor for construction was difficult to find, and social distancing made workers less productive. Currently, rising prices for materials and pre-order items are driving margins down. This is how we find ourselves in the current housing boom.

But this boom is not a bubble, because the rise in prices is easily explained by cheap mortgages and supply constraints. Recent housing construction is below historical averages, although this is justified by lower population growth. But with the move from multi-family to single-family housing, recent construction volumes make sense. To maintain a reasonable balance, there should be no sudden drop in new construction.

When will the boom end? Two keys are meeting new mortgage demand and rates. Low mortgage rates have allowed young families to buy homes sooner than otherwise. It hasn’t changed the shopping economy for people who never intended to become homeowners. Instead, low mortgage rates have enabled people to pursue their dreams earlier than they otherwise would have. In this sense, the strong housing market of 2020 and 2021 borrows from the future. However, the shift in preferences of people who used to be able to buy homes, from urban to suburban life, is a new constant demand. At least until they become disillusioned with home ownership.

Mortgage rates are likely to rise as financial markets expect inflation to pick up and the Federal Reserve’s move to curb inflation. While traditional Fed instruments affect short-term rates and only marginally affect mortgage rates, the Fed’s new actions have a direct impact on mortgages. The Fed buys mortgages in bulk, lowering mortgage interest rates. The Fed also buys many Treasury securities, which often compete with mortgages for institutional investors.

By mid-2022, mortgage rates are likely to rise by a whole percentage point, although this projection is higher than the average forecast of my fellow economists. They doubt long-term interest rates will rise by a percentage point even through December 2022. If they are right and I am wrong, then the housing market will stay strong longer.

Business leaders in the housing supply chain are expected to show strong sales this year, but do not expect further growth in the coming years. Major capital projects must be confirmed with 2019 sales.

Prospective home buyers should probably take it easy. It was a tough shopping season. While prices across the country are unlikely to drop, 2023 is likely to see easier shopping opportunities.


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