In February 2022, mortgage interest rates climbed above the four percent level. The sharp climb marks the highest interest rates since the beginning of the pandemic more than two years ago. On a year to date basis, the average monthly mortgage payment would be about $250.00 higher than one year ago. The immediate impact includes a drop in applications for mortgages; the drop in demand suggests that buyers must consider the long-term costs of home ownership.

Mortgage Rates Rise Sharply

On February 11, 2020, news reports that the mortgage rates increased twelve basis points to top four percent. At 4.02 percent, the 30-year rate climbed twelve basis points in one day to match a two year high. The rise coincides with Federal Reserve planned increases in bank rates.

During the pandemic, the Federal Reserve lowered key bank rates to near zero levels. The low interest rates were part of the Federal Reserve's effort to bolster the US economy during the Covid-19 pandemic. The Fed planned to tamp the markets by raising interest rates carefully.

The Federal Reserve initially planned a slow series of small increments. The Fed also used its buying power to purchase mortgage backed securities (MBS), and the MBS program also helped keep mortgage interest rates low.

First Time Buyers Feel Pinch

The rise in mortgage interest rates affect nearly every buyer by raising the costs of ownership. First-time buyers may feel the pinch more than other groups. First time buyers typically have lower cash reserves and fewer qualify for the top rates given to buyers with superior credit ratings and 20 percent down payments. The rise in monthly mortgage expenses will price many first time buyers out of local markets.

The consumer price index reflects high rates of inflation across the economy. Inflation reduces the levels of disposable income for family budgets. Inflation also hits the rental sector and rising rents have driven demand for home purchasing.

Prices Continue to Rise

Home prices continue to rise, and inventories remain low across most US markets. Prices rose at a year to year rate of 14.6 percent in January 2022 as nearly every major market showed sharp upward movement. The combination of higher prices and rising interest rates may lower the demand for mortgages. The low inventory favors sellers in many markets. Sellers can ask for higher prices due to short supply. Sellers have the further advantage of rising rental prices.

The US Economy Is Hot

The January Jobs report showed that the US economy added 467,000 jobs in January. The strong jobs report came amid strong concerns about Covid-19 and still elevated levels of daily infections across the US. The monthly economic data showed an unemployment rate of 4 percent even as more people look for work and re-enter the workforce.

The underlying structure of the US economy seems solid. Wages are climbing, employment is gaining impetus, and consumer demand is high. The weakness in the economy seems to be the stubbornly high rates of inflation.

The strong jobs report and low unemployment will free the federal effort to use its strategies controlling inflation. The Federal Reserve will shift its focus from stimulus to fighting inflation. The Fed may begin to sell more of the Mortgage Backed Securities purchased during the pandemic.

Economic Fundamentals Look Strong

A hot economy can carry inflation as wages and earrings increase. The benefits of high economic activity include growth, expansion, and positive economic environment. Private and public investment are on the rise. The federal government plans to rebuild critical infrastructure.

When planned levels of public spending on public works begin to unfold, better roads, bridges, and transportation infrastructure will help sustain high levels of economic activity. Employment and earnings will climb as the nation undertakes a massive infrastructure improvement program.

The Housing Market Remains Strong

The spring season typically brings higher inventories of homes for sale. 2022 promises to be different. The low inventory trend that surfaced in 2021 seems likely to continue. Low inventories will contribute to higher prices as demand will continue exceed supply. Buyers may be deterred by higher prices, but the lack of inventory and high rental rates will keep the demand trend going into the spring and summer of 2022.

Buyers seem keenly aware that mortgage interest rates will likely continue to rise. First-time buyers may need to improve financial flexibility in markets with rising home prices. For most buyers, the calculus is that it is best to buy now and get the best possible prices and mortgage rates.