Just as the housing market was settling into something resembling a “new normal,” the emergence of the omicron coronavirus variant brings a new layer of uncertainty.
While it’s next to impossible to predict the variant’s course or impact on public health or the economy, previous COVID waves give us a sense of what may happen to the housing market. For homebuyers, there are two things to keep an eye on: mortgage rates and home prices.
Omicron has the potential to affect both, but only time will reveal the full impact.
As a rule of thumb, chaos and uncertainty lead to lower mortgage rates, as we saw during the onset of the pandemic.
That’s because in uncertain times, investors look for stable, secure places to put their money, and mortgage backed securities (MBS) – home loans packaged together and sold on a secondary market – are exactly that. Demand for MBS drives down interest rates on these assets, directly affecting the mortgage rate you pay as a consumer.
And investors aren’t the only ones buying MBS during uncertain times. Throughout the pandemic, the Federal Reserve has been buying $40 billion in MBS per month in order to keep mortgage rates low and encourage homebuying and refinancing to stimulate the economy.
Early in November, the Fed announced a plan to gradually reduce — or taper — its purchase of MBS by $5 billion a month beginning in 2022. This was projected to cause mortgage rates to rise gradually throughout 2022. Meeting minutes released several weeks later showed the Committee was already discussing accelerating that pace based on inflation concerns.
The emergence of the omicron variant throws further uncertainty into the Fed’s taper plan.
As with the original coronavirus strain and the delta variant, the course of the omicron variant will be next to impossible to forecast. However, according to CNBC senior economics reporter Steve Liesman, there are three general directions the variant and the Federal Reserve’s reaction could steer mortgage rates.
The best case scenario, public health-wise, is that omicron is relatively contained and less disruptive than the delta variant. If this is the case, the Federal Reserve would likely accelerate the pace of its taper plan, as it discussed in its latest meeting, putting upward pressure on mortgage rates.
In the worst case scenario, omicron requires new vaccinations and shutdown measures, and substantially disrupts the economy. In this scenario, the Federal Reserve may halt the taper completely and continue stimulus spending that keeps mortgage rates artificially low.
In between, there is a range of business as usual scenarios where omicron is some blend of disruptive and manageable and the economy maintains its current course relatively unaffected. If this is the case, the Federal Reserve may leave its original taper plan intact and wind down its asset purchasing by mid-2022. Based on previous forecasts, that would leave mortgage rates to rise gently throughout 2022.
During a Tuesday Senate Banking Committee hearing, Federal Reserve Chair Jerome Powell seemed to favor accelerating the taper plan to tie a weight on inflation.
“At this point, the economy is very strong, and inflationary pressures are high,” Powell said. “It is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at our November meeting, perhaps a few months sooner.”
Any change to the taper plan will be announced at the Federal Open Market Committee (FOMC) meeting on December 14-15. Powell said the course of the omicron variant will factor into the rate of the taper plan.
Again, it’s incredibly difficult to predict the course of the omicron variant, but if it’s anything like previous COVID-19 waves, it’s likely to put upward pressure on home prices.
There are three main reasons for this. This first is that if uncertainty over the omicron variant causes mortgage rates to fall or remain in the low 3’s, homebuying demand will remain high as it has throughout the pandemic. Low mortgage rates drive demand and help homebuyers afford higher purchase prices.
In addition to mortgage rates, the omicron variant itself may further increase demand for single-family homes, as we’ve seen during previous COVID waves.
Throughout the pandemic, homebuyers have sought out larger living spaces with more room to work, learn, and play at home. There’s also been a migration from multi-family living in population-dense major metros to single-family living in suburbs and small metros. If the variant’s impacts are severe enough to trigger office shutdowns, and more people are able to work remotely, it may accelerate this migration and demand for single-family homes.
Finally, based on previous COVID waves, the omicron variant has the potential to further diminish inventory. In the worst case scenario, an economic shutdown could re-mangle already mangled supply chains, further hindering the creation of new homes. But even in less severe scenarios, virus fears and price growth have made homeowners more reluctant to sell.
According to Realtor.com, around 20% of potential sellers (although it varies by generation) expressed concern about showing their home or attending in-person open houses during the pandemic. And the top reason for not selling in 2021 – among most generations – was not being able to find an affordable home in their current market.
Omicron has the potential to exacerbate both health and affordability concerns, keeping much-needed existing-home inventory off the market.
With previous COVID waves as an indicator, any impact on public health and economic disturbance from the omicron variant is likely to increase demand, decrease supply, thereby putting upward pressure on home prices.