Close this search box.

The 2022 Housing Market: Inflation and Rising Mortgage Interest Rates

In December of 2021, announcements and speculations were made that pointed to higher interest rates for 2022.  Those announcements and speculations have proven to be true.  At the end of June 2022, the Consumer Price Index increased 9.1 percent over the previous 12 months – the highest since November 1981.

What Causes Inflation?

Inflation is caused by an imbalance of supply and demand.  With inflation increasing to the highest level since 1981, the Federal Reserve announced it would be raising the Federal Funds Rate aggressively to bring inflation back to an acceptable level.  Raising the Federal Funds Rate means making it more expensive to borrow money.

How Does Inflation Impact Mortgage Interest Rates?

As inflation increases, the demand for mortgage-backed securities/bonds decreases which pushes mortgage interest rates higher.  The mortgage industry saw rates increase from 3% in December of 2021 to 6% by mid-June 2022.

By mid-June, there were new concerns about an economic recession.  As inflation continues to increase, the chances of an economic recession also continue to increase.  An economic recession could mean few jobs and higher rates. While raising the Federal Funds Rate can decrease inflation, it can also slow down the demand for goods and services which again, can lead to fewer jobs and possibly layoffs.

The Federal Reserve can hopefully find the magic formula of the right approach of raising the Fed Funds Rate to bring inflation to an acceptable level while avoiding a recession.

How Does Fear of Recession Impact Mortgage Rates?

Although speculation is that mortgage rates could continue to trend higher, mortgage rates are less likely to increase as rapidly as they did in the first six months of 2022.  Since mid-June, mortgage rates did decrease as concerns of a recession started to be speculated. As a result, some experts are stating that interest rates may have peaked already.

In a recession, mortgage back securities/bonds are considered a safe investment that will increase demand for bonds, decreasing the yield which typically leads to lower mortgage rates.

What Does This Mean For Mortgage Rates In 2022 and Beyond?

It appears that mortgage rates may be settling for now.  For now, the fear of recession has been enough to impact the mortgage back securities which, again, has resulted in mortgage rates settling down. If the fear of recession increases, mortgage rates are expected to slowly decrease.  The demand for mortgages has also continued to decrease. At the end of July, mortgage demand was at the lowest level since February of 2000.

What Does Slowing Mortgage Demand Mean For The Housing Market?

A decrease in mortgage demands can mean normalizing the supply and demand of the housing market. This does cause a shift in the housing market for homebuyers and sellers.  Homes may be taking longer to sell. Some sellers are now lowering their sale price and/or negotiating to help with the buyer’s closing fees.

Since 2020, there has been a shortage in housing inventory, mortgage rates were at historical lows, and homebuyers continued to be competitive which created bidding wars resulting in a significant increase in home affordability.

With the higher rates compared to 2020, the demand has slowed down, the housing inventory is now increasing which is resulting in some price drops and stabilization in home pricing. Stabilization in rates and home prices along with increasing home inventory should hopefully bring back a more normal housing market in 2023.

If you are in the market for a home, reach out to a Mortgage Loan Officer to assist you through the process.

Dora Castaneda, NMLS ID# 420534

Mortgage Consultant


This memorandum expresses the views of the author as of the date indicated and such views are subject to change without notice. Community First Bank, HFG Trust, and HFG Advisors have no duty or obligation to update the information contained herein. Further, Community First Bank, HFG Trust, and HFG Advisors make no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is potential profit there is possibility of loss. This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services, banking services, or an offer to sell or solicit and securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Community First Bank, HFG Trust, and HFG Advisors believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This memorandum, included the information contained herein, may not be copied, reproduced, republished, or posted in any form without the prior written consent of Community First Bank and/or HFG Trust and/or HFG Advisors. HFG Advisors, Inc, is a wholly owned subsidiary of HFG Trust, LLC. HFG Trust, LLC is a Washington state-registered Trust company and wholly owned subsidiary of Community First Bank.