Inflation keeps home prices high, even with rising mortgage rates

Inflation keeps home prices high, even with rising mortgage rates

If you're a homebuyer hoping for a home sale price break amid rising mortgage rates, it probably won't happen this year or next.

Aside from the record low inventory, the main reason behind the rise in home prices indicates Inflation.

"[Inflation] will keep them positive. I don't expect to see an 18% rise in prices. That's a function of all the stimulus that's been in the economy and the desire to get away from the virus," Doug Duncan, chief economist at Fannie Mae, told Yahoo Finance. But we expect housing prices to be favorable.

Some homebuyers were waiting on the sidelines, hoping for a cool down in the housing market. 

Now that the 30-year fixed-rate mortgage rate increased last Thursday from 3.56% to 3.45%, some homebuyers may be hoping a lull is around the corner. Duncan said that's an unlikely scenario.

"If you go back to the late 1970s and early 1980s when interest rates were between 15% and 18%, home prices went up. Home prices and interest rates are uncorrelated," Duncan said. "What correlates with interest rates is the number of homes sold."

Even with the inventory drop, home sales were at a 16-year high in 2021.

"We expect existing home sales in 2022 to slow only 3.2 percent from 2021, which will still represent the second-fastest annual pace since 2006," according to the latest Fannie Mae housing market research.

With mortgage rates likely to rise from here, expect to see fewer first-time homebuyers or those hoping to buy at a low rate.

"We're starting to see a decline in first-time home buyers," Duncan said. "This will continue if interest rates go up and if house prices remain positive. 

Fannie Mae expects a 7%-8% year-over-year increase in the cost of the home. The mortgage giant's forecast is one of the most conservative. Goldman Sachs expects average home prices to increase 16% year-over-year for 2022.