The Federal Reserve is raising interest rates, with The Wall Street Journal reporting last week that a quarter-point increase was announced, with another 6 planned in the coming year alone. This will be the most aggressive increase pace in 15 years as central banks everywhere attempt to combat high inflation. As a result, mortgage rates are rising:

Source: Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MORTGAGE30US, March 22, 2022.

For current interest rates from seasoned lenders, check out instant online mortgage quotes.

For the current rate increase, the only dissenting vote by the Federal Open Market Committee was the St. Louis Fed President James Bullard, who was in favor of a larger half-point increase. For the next few years however, officials expressed doubt of a need to raise the benchmark rate above 3%.

In commenting on these increases, James Kleimann of Housing Wire makes some interesting points worth noting:

• The Fed’s plan is to raise rates six more times this year, plus three times in 2023.
• The Mortgage Bankers Association (MBA) expects rates to stay at 4.5% for 2022.
• Mortgage applications are dropping due to a lack of inventory (25% drop in home listings year-over-year in February, and a 48% drop since February 2020).

Lance Lambert of Fortune comments on the interest rate environment, and how the Bank of America believes this will affect housing prices:

“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.”

Charlie Wells and Claire Ballentine of Bloomberg note that rising interest rates will lessen the appeal and ability of homebuyers to make home purchases. Households will be strained by higher mortgage and other costs. This will likely put downward pressure on demand.

Justin Lahart of The Wall Street Journal jumps in to discuss the end of a low rate era and what it means for real estate. “For many Americans, the place where rising rates would have the clearest effect is housing. Mortgage rates have been very low for a very long time, boosting people’s perceptions of how expensive a home they can afford—part of why home prices have risen so much. Millions of people who already owned a home have refinanced their mortgages, dramatically lowering their payments. Higher rates could both make homes less affordable while reducing the number for sale since current owners who locked in low rates won’t want to give that up.”

Vacation homes

Dana Anderson of Redfin reported this week on how the demand for vacation homes is dwindling following a record rise during the pandemic. In February 2022, demand for second homes hit its lowest level since May of 2020, but demand was still up 35% from before the pandemic. And, as seen below, demand for second homes is historically high.

Source: Redfin (March 2022)

Redfin Chief Economist Daryl Fairweather had this to say about the new data:

“Rising mortgage rates, combined with rising home prices, are hitting the second-home market much harder than the primary-home market…That’s largely because vacation homes are optional. People don’t need a second home, but they do need a place to live. Still, people are buying up vacation homes more than they were before the pandemic, as work remains more flexible than it used to be.”

Zillow released its own data on second homes, with Nicole Bachaud reporting that vacation home mortgage applications increased 30% between 2019 and 2020, with the median value being 25% higher than primary residences. Vacation home mortgage applications were highest in Kane County, Utah, Nantucket County, Mass., and Grand County, Colo.

Source: Zillow (March 2022)

And business was good in the past year for short-term rental owners. According to Dan Latu of Business Insider, the average Airbnb host earned $13,800 in 2021, an 85% jump from pre-pandemic levels. Further, U.S. demand for short-term rentals jumped 22% last year as well, as supply continued to lag far behind demand, increasing only 2.6% between 2020 and 20221.

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Builder confidence

Builder confidence is waning amidst higher labor costs and material shortages. According to Danushka Nanayakkara-Skillington of the National Association of Home Builders (NAHB), in January the total number of single-family permits issued declined 0.6%. Across the country, year-to-date permit applications looked as follows:

Source: NAHB (March 2022)

Another NAHB report on government data indicates that construction materials continue to rise: “The prices of goods used in residential construction ex-energy climbed 1.6% in February (not seasonally adjusted)…Building materials prices increased 20.4%, year-over-year, and have risen 31.3% since January 2020. Over the past five months, the index has climbed 10.6%.”

As a result, Brooklee Han of Housing Wire reports that despite strong demand homebuilder confidence is dropping. “For the first time since September 2021, homebuilder confidence in the market for newly built single-family homes has dropped below the 80-point mark.”

Further, Nathan Bomey of Axios notes that the same builder confidence index hit 79 in March, but is still higher than July and August of 2021.