Housing Market: The ‘shocking’ impact of mortgage rates on Utah housing

The latest study from one of Utah’s leading real estate experts reveals just how much mortgage rates in excess of 5% have impacted the cost of buying a home — and what could be in store for the Utah real estate market in the years to come.

It predicts that the market is ready to turn a corner and cool off. But don’t hold your breath until a “bubble bursts” or an actual decline occurs.

“I expect we’re going to slow down here,” Dejan Eskic, a senior research fellow at the University of Utah’s Kem C. Gardner Policy Institute, said in an interview with Deseret News. However, he added: “I don’t think prices will go negative in the next year and a half, but I don’t think we’re going to see a crazy (price) acceleration.”

Here’s why:

“Shocking” rate hikes: As the Federal Reserve wages its fight against inflation, mortgage rates shot up from 3.76% in February this year to 5.23% in May. It was “one of the most dramatic increases on record in such a short amount of time,” Eskic wrote in a blog post published Wednesday.

In the past, rising interest rates have caused “prices to gradually ease or even come to a standstill,” Eskic said. “However, between April 2021 and April 2022, Utah home prices rose 24.4%, while interest rates rose from 3.06% to 4.98% over the same period.”

Eskic told the Deseret News in an interview that he was “shocked” to see how much this has impacted the monthly mortgage payments that homebuyers in Utah are willing to shell out to buy a home.

During that period from April 2021 to April of this year, the average monthly mortgage payment increased by nearly $1,000 from about $1,629 to $2,556 — a 56% jump.

And yet, Utah home buyers are still scrambling to buy, fueling what is still a highly competitive environment with homes flying off the market in a matter of days.

“What’s even more shocking,” Eskic wrote, “is that our average market duration is six days!”

Utah’s most populous county, Salt Lake County, has been targeted, and the homes were sold in just five days in April, according to the Salt Lake Board of Realtors. The median price for all home types in Salt Lake County was $550,000 in April, up 26% year over year.

Why is this happening? When the Federal Reserve cut mortgage rates amid the COVID-19 pandemic, those low rates “masked” steadily rising Utah home prices for some time, Eskic said.

While Utah home prices rose by about $73,000, homebuyers were still buying with relatively similar monthly mortgage rates from mid-2018 to early 2021.

“However, since early 2021, monthly payment growth has outpaced price growth,” Eskic wrote.

“So what can we expect for property prices in the future?”

Housing Market Forecast: Home price forecasters are currently predicting that national prices will rise 10.4% in 2022 and a further 3.4% in 2023, Eskic wrote.

But there is one major asterisk for Utah’s market.

Historically, the rate of growth in Utah home prices has “typically been slightly higher than national numbers. Therefore, we can expect our property prices to follow this trend,” Eskic wrote.

So what would it take for prices to actually go down?

“Continued higher interest rates and pre-pandemic inventories would create a scenario where prices slow or, dare I say, decline,” Eskic wrote.

Let’s not forget that Utah was struggling with housing shortages even before the pandemic roiled the national market. This housing shortage has only gotten worse – leaving homebuyers with a still-short supply and therefore a still-competitive market.

“We have the high rates, but we don’t have the inventory,” Eskic wrote.

While high rates have recently caused a surge in the stock of active homes for sale, today’s stock is still well below pre-pandemic levels.

“Our offer is better than two months ago, the selection is larger,” said Eskic. “But we’re still 49% below what we should be achieving at this time of year.”

Before the pandemic, Eskic research found that there were 2.3 new housing listings for every house sold. However, since January of last year, only 0.7 new homes have been listed for each sale.

“For a balanced market, we need to bring the sales to active offers ratio to a monthly range of 1.5 to 2.0,” Eskic said.

Why Prices Might Cool Down: A number of factors suggest that house price increases will soon slow down. One is the obvious issue of affordability, Eskic said.

“As interest rates and prices rise, nearly 71% of Utah households are above the average home price,” he wrote.

That’s causing more vendors to stay in their homes longer, he said. Sure, the dollar amount to sell might be tempting, but where else would they live? Combine that with the rise in mortgage rates, and it “magnifies inventory challenges,” Eskic said.

Consider it:

About 75% — 3 out of 4 — of Utah’s mortgages are under 4% and 31% are under 3%, according to Eskic’s research.

Today’s higher interest rates are likely to discourage potential home sellers, particularly those looking to upgrade, from putting their homes on the market because, in turn, if they bought elsewhere they would lose their low interest rates.

“Everyone will just get stuck. People will not sell their houses,” Eskic said.

Add that to another bearing pressure point: Utah’s rapid population growth.

“Oh, and we’re expecting another 248,539 households in Utah by 2030,” Eskic wrote, “but that’s a story for another day.”

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