Apr 29, 2022 3 min read

Most articles I write begin with something that happened in my office that gives me an idea. Today I am sitting in South Carolina with a friend discussing the housing market.

There are many factors that affect the housing market and today, I am going to try to explain monetary policy. Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply. By managing the money supply, a central bank aims to influence macroeconomic factors including inflation, the rate of consumption, economic growth, and overall liquidity.

In the last two-and-a-half years the monetary policy of the central bank of the United States has changed direction. These directional changes have created drastic changes in home prices. At the beginning of the pandemic the central bank increased the money supply. Trillions of dollars were pumped into the economy and the cost to banks to borrow money was at an all-time low.

Lower mortgage rates resulted in more people looking for a home. Some were first-time buyers who could now afford monthly payments. Others were looking to either downsize or upgrade to a larger home.

As these buyers entered the market the economic rule of supply and demand came into play. Home values rose faster than ever in 2021. The median sales price for an existing home was $346,900 in 2021, up a whopping 17% from the prior year. If you purchased early in 2021 you where able to benefit from both the lower interest rates and increase in your home value. Sellers realized the increase in market values enabled them to get more money for their home than they thought. Some realized their advantage only after they started getting multiple offers for their properties.

The common thread of 2021 was timing. Buying with low interest rates before prices got higher was the ideal result. Selling at higher prices while able to borrow at lower rates for a new home was even better. Overall, 2021 was good for buyers and sellers.

Now comes 2022. While home prices soared 17% in 2021, the overall inflation rate increased from 3.2% to 4.7%. Not a desired rate but manageable. The problem in 2022 is the inflation rate in the first quarter is expected to exceed 7.9%.

The best way I have heard inflation described is an added tax. To deal with this added tax the central bank has decided to raise interest rates and reduce the money supply. The result is in the last two weeks, 30-year mortgage rates have gone from 3% to 5%. With higher borrowing cost, the number of buyers should decrease. The question is, what will happen to home prices? My guess is they will not decline but the rate of increase will decline. Also remember this article is only on monetary policy. Other factors like demographics, labor cost, material cost and government regulation are still affecting prices.

Now if you want to sell your home today, you will get a higher price than last year. If you go to buy a new home, you will pay more for the house, and if you need financing, the rates will be higher. Overall interest rates and home prices are like the weather: They change.

Bob Hollick is a State Farm Insurance agent based in Washington. His column appears every other Friday in the Observer-Reporter.