Double Whammy!

By: Dr. M. Ray Perryman
Published in syndication May 11, 2022

Things are tough for anyone trying to purchase a house, with a double whammy of rising prices and increasing interest rates. Inventories are very low, and supply chain issues and labor shortages continue to complicate construction.

The past couple of years have seen median sales prices of existing homes jump by close to $100,000 in many Texas markets. Costs of existing homes had been rising fairly steadily for almost a decade before the pandemic. As COVID-19 increased remote work options and the need for additional space in homes for work and school, many people started looking to buy. Stimulus packages increased available cash, further fueling demand, while monetary policy moves to stabilize the economy pushed interest rates to historic lows. The result was a steep increase in housing prices as demand far outstripped supply.

Over the past few months, typical mortgage rates have jumped from less than 3% to well over 5%, quite modest by historical standards (they were higher from the 1960s through late 2009), but substantially above recent experience. Although the Federal Reserve doesn't directly control mortgage rates, tightening policy by reducing security purchases and raising the federal funds rate target generally signals other rates to rise. There is little doubt that Fed action is necessitated by inflation, but it also assures that borrowers will face higher costs.

Although there are many factors involved in individual loans, the change in mortgage rates is clearly affecting Texas homebuyers. For every percentage point the interest rate rises, monthly payments jump about $60 per $100,000 in loan value on a 30-year note. In the Austin area, for example, where the median sales price in March was over $520,000, the two percentage point increase we've seen since the beginning of the year means well over $500 per month added to the payment (with 10% down on a 30-year note).

Among the hardest hit groups are first-time buyers and those looking in lower price ranges. When prices for everything from food to gasoline are also rising, higher costs for housing are even more difficult for many to navigate. Housing values further translate to incremental property taxes and insurance costs, which affects even those who aren't currently buying. Rents have increased sharply as well.

Construction challenges and price increases for essential inputs will keep new homes pricey and discourage building lower-cost residences which typically provide smaller profit margins. Interest rates will likely continue to rise as the Fed battles inflation, and there are notable near-term headwinds. There are early signs that the market may be calming down to some degree as people give up or are "priced out" of the market, but unfortunately, it's unclear that relief is coming any time soon. Stay safe!