How Rising Rates Will Affect Both Sides of the Real Estate Sector

By Scott Roberts

America has enjoyed near zero interest rates for quite a while, but all good things must come to an end. The whispers of rising rates now pose a challenge to investors and lenders alike. In particular, the real estate industry, which has been flaming hot, is going to feel the burn from rising rates. This article will highlight how both mortgage lenders and home buyers are going to have to adapt to the inevitable rise in rates, and what this means for real estate’s hot streak.

As rising rates emerge out of the shadows, the biggest threat pertains to refinancing. According to the Mortgage Bankers Association’s forecast, mortgage refinancing is predicted to drop 62% down to $860 billion.[1] Many home owners have been enticed by this last year’s low rates, making it a no brainer to refinance and lower their monthly mortgage payments. However, with rates on the rise, that incentive no longer exists, and refinancing is no longer strategic. As a result, mortgage lenders now risk losing a big part of their business, and homeowners looking to refinance are going to have to stick with their current mortgages.

While this may seem like bad news for mortgage lenders, there is an upside to the lurking rise in rates. The Mortgage Bankers Association’s expects mortgage originations for home purchasing to increase 9% to $1.73 trillion in 2022.[2] This is an extremely significant and bold prediction, as this projected level of home purchases be record setting. For lenders, this would help soften the blow they are going to take from the drop in refinancing business. For buyers however, this prediction seems pretty unrealistic. The increase in rates is objectively unfavorable, as higher rates results in higher mortgage payments. Current monthly mortgage payments are already $150 higher than they were a year ago,[3] so increasing the rates will only further discourage home buyers.

Furthermore, the rising cost of homes needs to be considered. Supply chain issues are wreaking havoc across all sectors, and real estate has been particularly susceptible. Lumber costs spiked near 300% during the pandemic, and while the spike has softened, costs are still up 75% from last year. [4] Unfortunately for buyers, Goldman Sachs analysts have already taken this into consideration, forecasting home prices to increase by 16%, on top of this last year’s 18% increase.[5] Combined with the rise in interest rates, it seems unlikely home purchases will rise as high as the Mortgage Bankers Association is predicting. Thus, the question arises, how can potential home buyers work around high mortgage payments? And why did the Mortgage Bankers Association predict an increase in mortgage originations if both interest rates and prices are rising?

First and foremost, many experts are counting on Millennial’s to strengthen the demand for the housing market. According to Fortune, Millennials are entering the prime age range for home buying, which will boost mortgage originations.[6] This may explain why experts expect mortgage lending to power through the incoming interest rate increases. However, millennials are getting creative. According to the Wall Street Journal, millennials are pooling finances with friends and roommates in order to compensate for the stress of costly housing and rising rates. In fact, the number of co-buyers with different last names increased by 771% since 2014.[7] With rates and home prices on the rise, this may be the beginning of a home buying trend that is here to stay. For lenders, this trend holds a lot of potential. More millennial friends buying houses together would increase business for loan originations. Moreover, there is less credit risk attached to a mortgage being paid by a pair of millennials, rather than one millennial trying to front the cash all by their self. In turn, it could be strategic for lending firms to recognize and encourage this developing trend.

While the increase in rates is unavoidable, it doesn’t seem to be slowing down the real estate sector, but rather forcing it to transform. The increase in rates will only make it harder to buy homes, but buyers are already adapting. Respectively, lenders will need to shift their focus from refinancing to targeting potential millennial buyers. At at the end of the day, people still want to own a home, even if it’s expensive. Millennial’s have been conditioned their whole lives to purchase a home, and the eventual ownership of a home promises much more value than the alternative of renting. It may look different than what we hold as conventional, but rising rates are only going to push the real estate sector forward, growing pains and all.

[1] Diana Olick, “Mortgage Originations Will Drop”, CNBC, October 18, 2021, https://www.cnbc.com/2021/10/18/real-estate-mortgage-originations-will-drop-33percent-in-2022-as-interest-rates-rise.html [2] Diana Olick, “Mortgage Originations Will Drop”, CNBC, October 18, 2021, https://www.cnbc.com/2021/10/18/real-estate-mortgage-originations-will-drop-33percent-in-2022-as-interest-rates-rise.html [3] Jacob Passy, “Mortgage Rates Jump”, Market Watch, October 3, 2021, https://www.marketwatch.com/story/mortgage-rates-jump-above-3-creating-pressure-for-home-buyers-11633011496 [4] Diana Olick, “Housing Boom is Over”, CNBC, July 26, 2021, https://www.cnbc.com/2021/07/26/housing-boom-is-over-as-new-home-sales-fall-to-pandemic-low.html [5] Lance Lambert, “Goldman Sachs Predicts Home Prices”, Fortune, October 18, 2021, https://fortune.com/2021/10/18/home-prices-2022-us-real-estate-outlook-buying-a-house/ [6] Lance Lambert, “Goldman Sachs Predicts Home Prices”, Fortune, October 18, 2021, https://fortune.com/2021/10/18/home-prices-2022-us-real-estate-outlook-buying-a-house/ [7] Alex Janin, “Millennials Team Up to Fulfill the Dream of Homeownership”, WSJ, October 11, 2021, https://www.wsj.com/articles/millennials-dream-of-homeownership-11633698676