Two important changes take effect in 2022 that will shape the housing industry over the next year. As of Jan. 1, the conventional loan limit is $647,200. That means you can get a loan up to that amount backed by the government. This would be something like an FHA loan for a first-time homebuyer. These loans typically come with lower down payments—just 3.5% for some borrowers! This is meant to help accommodate quickly rising home prices. 

Second, an announcement just this week from the Federal Housing Finance Agency (FHFA) will affect borrowers looking to buy a second home or those who use the high-balance loan option. High-balance loan limits go up to $970,800 and are specifically for buyers in high cost areas like parts of California, Hawaii and Alaska. Now, those loans are also subject to an upfront fee by the FHFA of 0.25% to 0.75%. For people buying a second home, like if you were to purchase a beach house, fees are being raised by 1.125% to 3.875%. The fee increase you see will depend on the loan-to-value (LTV) ratio for your loan. These changes go into effect for loans delivered (sold) to the agencies on or after April 1, 2022.

These two changes are especially important because interest rates are about to start climbing in earnest as we move through 2022. At the end of 2021, interest rates were holding steady around 3.11%, according to Freddie Mac's 30-year fixed-rate mortgage average. The latest average showed rates creeping up to 3.22%. Freddie Mac's analysts said in their report, "With higher inflation, promising economic growth and a tight labor market, we expect rates will continue to rise. The impact of higher rates on purchase demand remains modest so far given the current first-time homebuyer growth."

THE FED'S IMPACT ON RATES

Over the next few months, the Federal Reserve will be quickly tapering the bond and mortgage-backed securities (MBS) purchases it has been making since the onset of the pandemic. Furthermore, the Fed will likely raise the overnight lending rate at least once this year. Despite the ongoing spread of COVID and its variants, the minutes from the central bank's meeting in December showed policy makers are more heavily weighing the potential risks of continued inflation. 

The Fed's tone was more "hawkish" than expected and stocks reacted strongly to the news. Essentially, the Fed is about to stop supporting the markets as much as it has been. Beginning in March 2020, the Fed reduced the overnight lending rate to 0% and started purchasing $120 billion per month in Treasury bonds and MBS. This is what allowed the housing market to stay so strong and keep rates at historic lows. The tapering process will likely end around the end of Q1 and you can expect to see interest rates slowly rise during this time.

Rising rates may help to cool down demand and increase inventory seeing as how home prices are still accelerating at a strong pace. The S&P CoreLogic Case-Shiller National Home Price Index recorded an 18.7% pace of increase to home prices in November. The good news is that this was a deceleration of this summer's near 20% pace. A senior economist for Zillow, Kwame Donaldson, noted as much in a statement, saying, "Since the start of the pandemic, house prices in the U.S. have been inflated by historically low interest rates, supply restrictions which included a foreclosure moratorium, and increased savings for a down payment due to limited options for discretionary spending. House price growth is now slowing because many of these supports have expired or are dwindling. But other supports remain – the U.S. labor market touts low unemployment and robust wage growth, a tsunami of millennials are reaching the peak age for first time homebuyers, and the for-sale inventory unexpectedly tightened in October and November.”

OF NOTE:

• December's jobs report from the Labor Department was extremely disappointing yet again, with data showing just 199,000 jobs were added. It's important to remember that this data is a snapshot of the first few weeks of the month, with this report taking in data for the week ending Dec. 12.
• Private payrolls rose by a whopping 807,000 in December—much higher than the 410,000 estimate from economists. Growth in leisure and hospitality services made up more than one-third of the job growth for the month.