The US residential housing market has been on a tear for over a year and a half. The COVID19 crisis unexpectedly changed consumer home buying behavior, pushing more families into suburban locations with outdoor amenities and greater square footage. In addition, residential housing demand from millennials has increased substantially, making this demographic the single largest buyer. All of this is taking place at a time when the inventory of new and used homes for sales is at historical lows.
It is a great time for sellers of real estate. However, buyers continue to face challenges. Unfortunately for buyers, in 2022 they might see these challenges increase. As recently reported in the Wall Street Journal, “U.S. mortgage rates this week rose to their highest levels since May 2020, driving up the costs associated with home buying at a time when home-sales prices are already near record highs. The average rate for a 30-year fixed-rate loan was 3.22%, up from 3.11% last week, according to mortgage finance giant Freddie Mac. A year ago, mortgage rates stood at 2.65%.”1 Given the low levels of housing inventory for sale, the cost of buying a home has already been a challenge for most buyers – particularly first-time buyers. Future higher mortgage-related costs would not be a welcome development for most.
Over the last few decades, low mortgage interest rates have been a powerful force underlying strength in the US housing market. Low rates have been particularly helpful over the last two years as the US economy worked its way through the COVID crisis. As detailed in the article, “Ultralow interest rates have been a major force in the housing boom of the last two years. Households that kept their jobs and saved money during the pandemic seized on low borrowing costs to buy bigger homes that could accommodate working or schooling from home.”1 Low rates helped to fuel home valuation increases that led to greater home equity wealth and a boom in mortgage refinancing that offered many homeowners needed cash. Higher mortgage rates could potentially slow this trend.
Interest rate increases by the Federal Reserve are not yet a given. A lot can happen in the economy over the course of the year. We certainly learned that lesson in 2020 as the COVID crisis arrived quite unexpectedly. However, most market experts believe that future rate increases are a high probability. As summarized in the article, “Fed-funds futures showed Thursday that investors think there is a 75% chance the Fed will raise rates by its March meeting. They showed a near 50% chance that the central bank will raise rates by at least four quarter-percentage-point increments this year.”1
Still, there are still plenty of reasons to be remain bullish on the residential real estate market. While increases in interest rates will undoubtedly add to the cost of buying and owning a home, rates are still at an historically low level, and there remains a backlog of home buying demand. From the article, “Mortgage rates are still low by historical standards, and with strong buyer demand for homes, housing economists don’t anticipate an immediate or significant pullback in home sales. Existing-home sales rose in November to the highest seasonally adjusted annual rate since last January, and 2021 was on track to be the strongest year in home sales since 2006.”1
At Aloha Capital, we agree that one or more rate increases from the Federal Reserve this year is likely. While we understand that an increase in mortgage interest rates could be detrimental to some home buyers, we don’t believe that the magnitude of any rate increase poses much of a threat to the overall housing market. The market is still primarily being driven by strong buyer demand (particularly from millennials) and historically low inventory levels. Neither of these factors will go away soon and will most likely keep the underlying fundamentals strong for some time moving forward.
“Mortgage Rates Hit Highest Levels Since Spring 2020” by Nicole Friedman, Wall Street Journal, 1.6.2022
Steve Sapourn is an active real estate investor, Aloha Capital’s co-founder, and portfolio manager. At Aloha, Steve has overseen more than 1300 real estate investor loans in 35 states. He has managed alternative investments in a variety of asset classes for over 25 years. He has deep experience in designing low-risk portfolios that reliably outperform benchmarks. Over his career, Steve has served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies. In addition, he has developed and implemented quantitative trading strategies in the futures, stock, and volatility markets. Steve’s long and diverse career benefits Aloha’s investors.