Well, we knew it wouldn’t last forever. Rates in the high 1% (10 or 15 Year Fixed) and 2% range quickly have become a thing of the past. There are two main reasons for this:

  1. Rising Inflation
  2. The Federal Reserve started tapering its mortgage stimulus program, with the announcement that they will completely end it by March/April

Rising Inflation

I think we have all felt and seen inflation at the consumer level with rising prices at places like the grocery store and gas station. The Labor Department reported that inflation rose 7% in 2021, which is the largest yearly increase since 1982. Ouch. Rising inflation means rising interest rates, since lenders know that there will be a decrease in their purchasing power in the future. So they try to combat it by increasing rates ahead of time.

In addition to this, we fully expect that the Fed will be increasing the Fed Funds Rate, which is tied to Prime and directly to HELOCs (Home Equity Lines of Credit). If you have an equityline, know that your rate and payment will be increasing this year. The Fed initially announced to anticipate three rate hikes in 2022; now the anticipation will be for four rate hikes.

Tapering of the Mortgage Stimulus Program

When the pandemic hit, the Fed started purchasing mortgage market bonds to stimulate the economy and market activity – this is one reason we had such low rates, but it was an artificial decrease. Now that they will officially stop the program, rates will react naturally to economic changes and reports, which determines what investors will be buying.

Based on all this information, I think that we can all expect higher interest rates in 2022. It is important to remember that despite this, they remain at historically low levels, and refinancing may still make sense for many homeowners, especially if consolidating a high balance equityline. For purchases, yes, it will affect one’s max purchasing power, but typically I would think it would also naturally cool down the housing market. What do you think? Will higher rates drop home prices, or is inventory so low and demand still so high that we won’t see a change?