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Effects Of 'Out of Whack' Housing Market Should Be Short-Lived

Doug Page
Apr 20, 2022

Wharton real estate professor says effects of higher prices and mortgage rates should correct soon

Despite the rapid rise in mortgage interest rates and home prices, demand for housing remains very strong, says a Wharton School real estate professor. He predicts any chilling effects on the housing market will be short-lived and higher rents will push more people into home buying.

“What’s fascinating about the housing market right now is that the forces of supply and demand seem to be out of whack,” said Benjamin Keys during an interview on the Wharton Business Daily, a show that appears on Sirius XM radio. “We are in a really unique housing market right now, where we have both interest rates rising and we have housing prices rising.”

Despite the 30-year fixed mortgage being above 5% -- up from 3% a year ago – demand for housing, the professor says, is strong because millennials, a generation of buyers between the ages of 26 and 41, are looking for homes. In addition, Keys said, a strong labor market and higher personal savings are also driving the demand for homes.

“Aside from a few days in 2018 (when mortgage rates began to rise), we haven’t seen rates this high persistently since around 2011,” Keys said. “Mortgage rates are the real focus among a lot of people right now and trying to understand what impact (that is) going to have on housing markets.”

Similar to what a Redfin study says, as reported yesterday by NMP, the increase in mortgage interest rates is keeping current homeowners in their houses because the interest rate they’re paying for their mortgage is lower than what’s available today, the professor said.

But increased interest rates also keep prospective homebuyers out of the housing market, too, Keys added. In addition, the average price of a home, as reported by NMP, reached $412,700, up 17.3% or about $60,000, from about $352,000, a year ago.

Increased interest rates are also causing layoffs in the mortgage industry because of a loss in refis, making Keys wonder how banks and other financial institutions will make up the financial losses.

“The products that had teaser rates and option ARMs and all of that sort of scary monsters that we think of back during the financial crisis, those really grew out of a similar collapse in the refinancing market,” he said. “So, it will be interesting to see if lenders pivot to some of these more affordable products, especially in the face of high prices.”

The country is short 5 million homes, CNBC reported in September.

As for where interest rates will end up, Keys said, “I think there’s a ton of uncertainty about where rates are going to head in the coming year. We just have a very uncertain economy at the moment for so many reasons. We have the invasion of Ukraine. We have a variety of supply chain issues and then we have this question of how the Fed is going to approach issues with inflation and how aggressive they’re going to be.”

The Federal Open Market Committee, which sets interest rates, is scheduled to meet again next month, on May 3 and 4. There’s speculation the Fed will raise interest rates 50 basis points at its next meeting. The committee raised the Federal Funds interest rate 25 basis points at its March meeting.

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