Last year, home values held steady at inflated levels as low mortgage rates drove buyers to continue purchasing properties. But this year, mortgage rates look very different.
As of this writing, the average 30-year loan interest rate is sitting at almost 4.8%. That means we're no longer in an age of affordable borrowing, and at this point, it would be a stretch to call today's rates competitive.
The hope among everyday buyers and real estate investors alike is that rising mortgage rates will at least cause a drop in buyer demand. If that happens, home prices could start to fall in the course of 2022, making houses more affordable.
Image source: Getty Images.
Real estate investors who don't need to finance their home purchases might especially benefit from this scenario. And while we shouldn't expect a full-fledged housing market crash, recent data indicates that the age of lower home prices may soon be upon us.
Demand dropped in February
In February, pending homes sales fell 4.1% compared to January, according to the National Association of Realtors. That's the fourth month in a row of lower numbers.
Pending home sales are a measure of signed contracts on existing homes. And they're a strong indication of where the housing market is headed. When pending home sales start to decline, it's an indication that buyer demand is beginning to wane. And at a time when residential real estate inventory is extremely limited, that's a good thing -- for buyers at least.
A double whammy for mortgage borrowers
As tricky and frustrating as last year's housing market was for everyday buyers, right now, they're in an even tougher spot. Home values remain elevated, but mortgage rates are no longer low enough to compensate for these higher prices. But if prices start to come down, that changes an otherwise bleak picture.
In fact, if buyer demand really plunges this year, those looking to purchase a home could regain the edge they've been missing since mid-2020. That's when mortgage rates started dropping to historic lows.
Should sellers be worried?
Today's sky-high home prices aren't sustainable -- especially at a time when mortgage rates are no longer as competitive as they were last year. This doesn't mean that sellers have to fear a housing market crash. But it does mean that those looking to list their homes may want to do so sooner rather than later.
If mortgage rates continue to rise (a likely possibility due to plans on the part of the Federal Reserve to implement additional rate hikes), buyer pullback is likely to increase. Sellers who manage to put their homes on the market this spring might still manage to get in at a time when demand is strong enough to command a more attractive sale price.
But to be clear, the longer sellers wait to list their homes, the less they stand to profit. Pending home sales have already been trending in a downward direction. If that continues, buyers could end up with a lot more bargaining power by the time 2022 comes to an end.
Pending Home Sales Fell in February. Are Buyers About to Regain Their Edge? - The Motley Fool
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