How Will Rising Interest Rates Affect Purchasing Power in California?

California mortgage rates have risen in recent weeks. In fact, the average rate for a 30-year fixed mortgage loan recently hit its highest level since January of 2020, according to Freddie Mac.

During the second week of February 2022, 30-year mortgage rates rose to an average of 3.69%. At the end of 2021, that average was at 3.11%. So they’ve climbed a bit since the start of the year.

Which begs the question: How will rising interest rates affect purchasing power for California home buyers in 2022? Here’s an in-depth look at this subject.

Will Rising Mortgage Rates Reduce Purchasing Power?

In a real estate context, “purchasing power” refers to a home buyer’s financial ability to buy a property. It can also be referred to as “buying power.”

Purchasing power can be affected by changes in housing and borrowing costs:

• When home prices and/or mortgage rates drop, purchasing power goes up. It then becomes easier for a typical home buyer to purchase a house.
• When house prices and/or mortgage rates rise, buying power tends to decline. In this scenario, it becomes harder for the average home buyer to make a real estate purchase.

During 2021, purchasing power for California home buyers declined due to rapidly rising house values. According to Zillow, the median home value for the Golden State rose by a whopping 20% over the past year alone (as of February 2022).

Mortgage rates, on the other hand, remained very low for most of 2021 and therefore increased buying power among California home buyers. The average 30-year mortgage rate hovered below the 3.25% threshold for all of last year, which is very low by historical standards.

But over the past few weeks, home loan interest rates in California and nationwide have increased steadily. This trend could reduce purchasing power among buyers in 2022, especially if it continues.

Interest Rate Trends Over the Past Year

The chart below shows the average rate for a 30-year fixed mortgage loan over the past year or so. On the right side of the chart, you can see the upward climb mentioned earlier. As of February 10, 2022, the average interest rate for a 30-year home loan in California and nationwide was 3.69%.

The big question is whether this upward trend will continue as we move further into 2022, or if rates will level off within this higher range.

Last month, the Mortgage Bankers Association (MBA) predicted that the average rate for a 30-year fixed loan would reach 4% by the end of this year. That same month, researchers from Freddie Mac predicted they would average around 3.7% during the second half of 2022. So here we have two forecasts predicting that rates might rise further in the months ahead, compared to where we are now.

What California Home Buyers Might Encounter in 2022

So what’s the outlook for the rest of 2022? Will rising interest rates reduce purchasing power among California home buyers, over the coming months?

While no one can predict such trends with complete accuracy, the general consensus is that mortgage rates could inch higher in the months ahead.

On February 10, researchers from Freddie Mac wrote:

Rate increases are expected to continue due to a strong labor market and high inflation, which likely will have an adverse impact on homebuyer demand.

But this might not be the biggest concern for California home buyers, when it comes to purchasing power. Even if interest rates do creep upward a bit more during 2022, they’re expected to remain below 4% (on average) for some time.

Home prices, on the other hand, could create a bigger challenge for some home buyers. Mortgage rates are one part of the “buying power” equation. But house values tend to have an even bigger impact on purchasing ability.

As mentioned earlier, home prices in California rose steadily over the past year. This was largely due to an ongoing imbalance between supply and demand. (Plenty of demand, not enough supply.) Looking forward, forecasters expect prices to continue climbing in 2022 — at least for most California cities.

The Bottom Line: Urgency Might Be Warranted

There’s a good chance rising interest rates and home prices could reduce purchasing power for California home buyers in 2022. That’s the number-one takeaway from this article.

Numerous forecasts have suggested that home values could continue to rise this year. Also, as mentioned above, a pair of recent mortgage forecasts indicated that interest rates could climb higher in 2022. We’ve already seen some upward movement on this front, as shown in the above chart.

All of these trends could reduce purchasing power for California home buyers. So a sense of urgency might be warranted, when it comes to entering the real estate market. Putting off a purchase until later in 2022 might end up costing you.

Disclaimer: This article includes forecasts from third parties not associated with our company. Such predictions are the equivalent of an educated guess and should be treated as such.