Looking back on an unforeseeable year
Every year in December, we look back at what happened in the housing market over the past 12 months, and rate our ability to predict what would happen. We try to help you understand the trends that shape the mortgage and housing markets and offer a little informed opinion throughout the year. Some years we do better than others.
In some ways, everyone knows what’s happened this year—mortgage rates went up and home prices didn’t go down. This has been a difficult year for housing affordability.
But in other ways, it’s still extremely instructive to look back with the benefit of hindsight and see just how tumultuous this year was. For instance, did you remember that when we woke up on New Years Day, 2022, the average mortgage rate you could get on a loan was right around 3.11%? Today, the average rate has been hovering near 7%, more than double where we started the year.
Therefore, it’s no surprise, we’re sure, what subject we’re going to start with:
The headline of the year: Mortgage rates
As stated above, mortgage rates have more than doubled this year. A year ago at this time, low mortgage rates were driving a seller’s market, with many buyers bidding on the same homes just to be able to take advantage of historically low rates.
Part of the reason that rates were historically low was that the Federal Reserve was trying to boost up the economy during the height of the COVID-19 pandemic. They cut their federal funds rate, the rate that financial institutions use to borrow from each other, to 0%. Mortgage rates and other loan products followed suit, dropping their interest.
But as the country and the economy started to come out of this pandemic-fueled period, the Fed signaled that they were going to start raising their federal funds rate, which is what they do when they want to get a handle on inflation. And raise them they did.
Why mortgage rates went up
Over the course of four straight meetings, the Fed raised their rate by 0.75% percentage points, also called 75 basis points. A single rate hike of 75 basis points had been previously unheard of, but four in a row was shocking. And mortgage rates followed suit, rising like few economists had ever seen.
All of this was to get a handle on inflation, which is a rise in prices of the things that we buy. When inflation goes up, the value of a dollar does down. It is one of the Fed’s primary missions to manage inflation, which was starting to become a problem as 2022 began. At the time, Fed chair Jerome Powell’s comments indicated that the organization wasn’t overly concerned with inflation. This led us to predict that rates may go up, but not dramatically. Over the first few months of the year, that proved to be a pretty spot-on estimate.
Introducing rollercoaster rates
In the middle of spring, however, rates started to increase at a faster pace, shooting above 5% in April. Through the summer, rates were on a rollercoaster ride, going up to near 6%, then back near 5%. In the fall, rates have gone steadily up, reaching past 7%. It’s been a dramatic and unpredictable time, with each new piece of economic news seemingly affecting rates.
When rates have gone down, homebuyers have pounced and locked in those dips. But when they go up, buyers stay on the sidelines. That’s because a small difference in the mortgage rate, combined with the rising prices of homes, can make a big difference in how much they pay each month. Which bring us to…
The real story of the year: housing affordability
What do you get when you combine high home prices with high rates? A housing affordability crisis. As home prices and mortgage rates soared faster than average wage growth, fewer and fewer home shoppers can afford the monthly payments that they would need to make to own the home.
Housing affordability defined
How much a homeowner can afford is determined by the combination of all of the expenses that make up monthly house payments, including mortgage, taxes and insurance, compared to wages. The mortgage in particular is determined by the price paid for the home, so the greater the home price, plus the higher the mortgage interest rate, the more your monthly payment will be.
The price of homes have been driven up over the last few years by a couple of reasons, but it all comes down to the tried and true economic principal of supply and demand.
Low supply of available homes for sale has been a problem since before the pandemic. With fewer homes on the market, the ones that are for sale find themselves in bidding wars with eager buyers. This drives up the price of homes.
Now rates have gotten higher, but home prices haven’t come down. That makes it harder to afford a paying for your home each month.
The difference a year makes
Consider if you purchased an average priced home this year versus last year using the average nationwide home price from the third quarter of 2022 versus 2021, and the average 30-year fixed-rate mortgage rate from the end of October both years as well. These numbers are meant to serve as an example, but let’s say you could put down 20% on an average priced home in 2021 and have the same dollar amount for a down payment this year. Just take a look at the difference in monthly costs for the same home, purchased at different times one year apart:
National Average Home Price
National Average Mortgage Rate
Monthly Payment (including taxes, insurance, and PMI)
*Sample rate provided for illustration purposes only and is not intended to provide mortgage or other financial advice specific to the circumstances of any individual and should not be relied upon in that regard. Guaranteed Rate cannot predict where rates will be in the future.
So, in this scenario, the same average priced home would cost a homebuyer $1,115 more each month and $13,380 more a year*. That difference has priced many people out of the market in 2022.
Home prices kept rising, until they didn’t
We’ve already mentioned this, but it’s worth singling out that home prices rose steadily this year. At the beginning of the year, when mortgage rates were low and it was a seller’s market with lots bidding wars, median sales price of single-family existing homes was $368,200. In the third quarter of 2022, the median sales price of single-family existing homes was $398,500.
This growth occurred despite an meteoric rise in mortgage rates, which seemingly cooled buyer demand. Part of this is due to something called downside stickiness, which is the tendency of prices on big items like homes to resist drops in pricing. And part of this is due to our old friend low housing inventory.
But, starting around August of 2022, home prices seemed to cool off. While year-over-year home price numbers continued to go up in the third quarter of 2022, prices declined from the second quarter. While some of this can be attributed to seasonal buying tendencies, it may be the home prices are starting to respond to higher rates and start to tick down. This is a trend worth keeping an eye on.
Home construction sputtered
All eyes have been on home builders, hoping that they can help ease our inventory concerns with a wave of new homes popping up over the country. But housing starts have not increased steadily to match these hopes.
With rising mortgage rates, builders are hesitant to invest in new construction because they’re worried they won’t be able to recoup their investment. So even though the supply of homes is low, with mortgage rates high, demand for new homes is also low. We thought construction would pick up in 2022, and there were times when housing starts did increase throughout the year, but those increases weren’t steady due to rising mortgage rates.
Competition with all-cash buyers
Buyers who financed their purchase with cash, mainly investors, had an outsized influence on the market this year. All-cash purchases accounted for 35.7% of all home sales in the third quarter of 2022, which was up from the previous year. These purchases have some built in advantages when it comes to competitive bidding on a home. They can close faster because they don’t have to wait for financing, and they offer more assurances that the deal will go through because it doesn’t have to be approved by an underwriter.
That’s why Guaranteed Rate introduced our proprietary FastTrack platform. With it, you can be in the fast lane by having one person handle both the processing and the underwriting. Qualifying homebuyers could be clear to close in as little as 24 hours†, with final closing on their dream home in as fast as 10 days‡. FastTrack can make you as fast as cash.
New (and old) ways to save on your mortgage
As buyers, and sellers, have been limited in their options due to higher mortgage rates, everyone is looking for solutions to help them save on their mortgages. That’s led to a resurgence of loan options designed to help homebuyers ease into homeownership with generally lower rates over the first few years of their mortgage.
- Rate Reduce Program – Our Temporary Buydown products reduce your interest rate for the first year or two of your loan through a seller contribution that lowers the rate during the initial period, and then payments go back up after that initial period is over.§
- Adjustable Rate Mortgages (ARMs) – offer an initial period of time (usually 5, 7 or 10 years) with a lower rate, then the rate adjusts over the rest of the loan, usually at a higher rate.
These loan options, along with FastTrack and other programs like PowerBid Approval, are just a few ways that Guaranteed Rate is helping homebuyers navigate the unprecedented changes that have occurred in 2022. Because no matter what changes in the housing market, working with an expert loan officer is the best way to stay up-to-date.
Savings, if any, vary based on the consumer’s credit profile, interest rate availability, and other factors. Contact Guaranteed Rate, Inc. for current rates. Restrictions apply.
†The Guaranteed Rate FastTrack provides that eligible borrowers will receive a "Clear to Close Loan Commitment" ("CTC") within twenty-four business hours from Guaranteed Rate's receipt of all necessary borrower documentation. Guaranteed Rate reserves the right to revoke this "CTC" at any time if there is a change in your financial condition or credit history which would impair your ability to repay this obligation. CTC is subject to certain underwriting conditions, including clear title and no loss of appraisal waiver, amongst others. Read and understand your Loan Commitment before waiving any mortgage contingencies. Borrower documentation and Intent to Proceed must be signed within twenty-four business hours of receipt. Not eligible for all loan types or residence types. Fixed rate conventional loans on single family residences only with at least 20% down payment. Eligible for primary and second homes. Property must be eligible for an Appraisal Waiver and borrower must opt in to AccountChek for automated income and asset verification. Self-employed borrowers and Co-borrowers are not eligible. Not all borrowers will be approved. Borrower's interest rate will depend upon the specific characteristics of borrower's loan transaction, credit profile and other criteria. Offer not available from any d/b/a or operations that do not operate under the Guaranteed Rate name. $250 Closing Cost Credit is available from 5/1/22 through 11:59 PM, 12/31/22 and is applied at closing, no cash value. Not available in New York, West Virginia, Kentucky, or Texas. Restrictions apply. Contact Guaranteed Rate for more information.
‡Guaranteed Rate cannot guarantee that an applicant will be approved or that a closing can occur within a specific timeframe. All dates are estimates and will vary based on all involved parties level of participation at any stage of the loan process. Contact Guaranteed Rate for more information.
§Buy down options are available from participating builders and sellers on select properties