During the epidemic, there was a significant lack of housing on the market. Sellers avoided putting their houses on the market as a result of this huge scarcity, which resulted in unprecedented price growth.

However, up until the beginning of 2022, purchasers had a respite in the midst of a tight-inventory market. That’s because mortgage rates plummeted to all-time lows during the second half of 2020, and they stayed there throughout 2021.

Rates have increased significantly since the start of this year. It was possible to obtain a 30-year mortgage for well less than 4% at the beginning of 2022. The typical 30-year loan is now more than 5%.

That is, in fact, creating a housing affordability crunch not seen in almost two decades. It also implies that individuals who are looking to buy a home may have to reconsider their short-term home purchasing plans.

Affordability is plummeting

According to data firm Black Knight, recent mortgage rate hikes have put purchasers in the worst position since 2007 when it comes to affordability. Based on current mortgage rates, the typical American family would have to spend 29% of its monthly income on a home mortgage payment. The last time affordability was this bad was in 2007.

So it’s important to understand that when we say “affordable,” we’re talking about first-time or new home buyers, not existing property owners. Because many purchasers are tied into fixed-rate mortgages, rising rates should have little effect on them. Today’s homeowners, in fact, have it rather good: they’ve got record levels of home equity that they can tap as needed.

In fact, today’s purchasers are facing a severe affordability problem. And, even investors may find that mortgage rates are too expensive.

Will the housing market cool off?

Mortgage rates could rise considerably, resulting in a sustained drop in buyer demand. Even if housing inventory does not increase dramatically in 2022, it might lead to lower home prices.

In that scenario, people who are not involved in the real estate market may wish to postpone buying a house. Those that do so risk seeing their property values going down in the near future.

Meanwhile, those wanting to invest in real estate more quickly should consider buying into REITs rather than putting actual properties on their portfolio. REITs are a far more liquid investment to begin with, and given that we don’t know where the housing market is going due to rising borrowing rates, they may be a safer bet.

Of course, real estate investors with a lot of cash may choose to skip the mortgage and purchase a property outright when property values start to drop. Borrowing rates are likely to rise for a while, so locking in an expensive mortgage may not be worth it for investors with too much money on hand.

Cash offers, on the other hand, should be taken with a grain of salt by both everyday buyers and investors. When making a cash offer, remember that tying up assets in an illiquid investment comes with risk. In today’s economy, cash offers provide purchasers a distinct advantage over their competitors. Financing a property may still make sense for many individuals even though mortgage rates are increasing.

In conclusion, we don’t know where house prices will go this year. What we do know is that right now, they are more expensive than they have been in many years.

Author: Steven Sinclaire

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