Rising mortgage interest rates could be a curse or a blessing for prospective homebuyers, depending on a host of factors. With a housing shortage, builders unable to meet demand, and millennials wanting to become homeowners, rising interest rates are a new wrinkle in the home buying challenge.

Two sides to the argument

The U.S. Federal Reserve recently announced that it will reduce its purchases of bonds and mortgage-backed securities. This move will translate to higher monthly mortgage rates. But higher rates could prove to keep prices steady and lessen competition for buyers in some markets. This may help buyers facing bidding wars in some areas, as this activity is likely to cool, providing welcome relief, especially for potential first-time homeowners.

The downside

In markets where home prices are holding steady, higher interest rates will be a double hit for some- a higher home price and higher monthly payment.

Leonard Kiefer, deputy chief economist at Freddie Mac, the government-backed organization that helps support the U.S. housing market, cautions that it will be less affordable a year from now.

Mortgage rates are expected to reach 3.2% by year’s end and increase to 3.7% by the end of 2022 for 30-year fixed-rate loans. Housing prices could see a 7% increase in 2022, according to Freddie Mac’s price index. It still beats the 16.9% growth of 2021, but it could make buying a home unaffordable for many.

Thirty-year fixed-rate loans hit a low of 2.65% in January, fueling the unprecedented explosion of home prices in the early days of the pandemic. This meant that homes could cost more, but the monthly mortgage payments stayed the same as they were when rates were higher.

At the end of October, rates averaged 3.14%, according to Freddie Mac data.

Even 3% is exceptionally low- less than the current rate of inflation, which was 5.4% in September, according to the Consumer Price Index. What this means is banks aren’t even charging enough in interest to make up for the value that money loses over time due to inflation.

Millennials, the largest demographic group in the U.S., now in their 30s, are now looking to buy their first home.

However, the number of homes available has decreased as construction has declined and single-family homes are being turned into rentals by investors.

First-time homebuyers specifically will continue to see rising prices because of the housing shortage, says Jodi Hall, president of Nationwide Mortgage Bankers, a lender.


The potential upside

While some buyers may be priced out of the market, less buyers means less competition, and that may result in steady or even lower home prices. When it comes to paying a mortgage, a home that costs less with a slightly higher interest rate may be equal to a more expensive home at a lower interest rate.

As supply chain problems ease, expect new construction to increase.

Also, be aware of affordable housing developments coming online in your area. While some are aimed at very low-income buyers, some address our island’s workforce with moderate incomes.

For the most current information available on the housing market in your region, contact your Destination Maui Realty agent, who will work with you to find a home to fit your needs.


View All Lifestyle Blog Posts