Another half-percent to 1 percent increase in interest rates could push those monthly mortgage payments up another 12 percent, according to an analysis by UBS.

Are Greater Boston home prices finally nearing their peak? 

Home prices in Boston and its suburbs jumped 25 percent over the course of the pandemic, hitting $750,000 at the end of December, according to the Greater Boston Real Estate Board.

That was followed by another bout of double-digit increases during the first two months of 2022. 

But over the past month, the outlook has suddenly shifted, both for housing market and for the world economy as a whole. 

Faced with the danger that already-high inflation could spiral out of control, the Federal Reserve has embarked on what is expected to be a series of rate hikes. 

Russia’s invasion of Ukraine has added another, volatile and unpredictable element into the global economic mix, with the fallout putting further upward pressure on both oil and likely food prices. 

It would be a stretch to say the booming housing market is in danger of going bust. But as we head into the spring market, predictions that 2022 would see home prices continue on their record tear, posting another year of double-digit increases, no longer looks like a sure bet. 

A Momentum Shift Seen 

The Fed’s rate increases and the surge in energy prices in the wake of the Ukraine war are hitting the housing market at a vulnerable moment. 

While home prices in the Boston area and across the state were continuing to hit record highs at the end of February, there were already signs of trouble building. 

Statewide, sales of both single-family homes and condos posted big drops in February, according to The Warren Group, publisher of this newspaper. It marked the eighth month in a row that sales have fallen while prices rose. Homes in Boston and its three smaller, northern neighbors – Suffolk County – fell nearly 3 percent over the first two months of 2022, according to the Warren Group. 

Even before the latest developments, the relentless rise in home prices has been increasingly pricing buyers out of the market, while a decades-long decline in single-family home construction in the Boston area has contributed to a severe shortage of listings. 

Now nearly-maxed-out prospective buyers are facing a double whammy. War-related jumps in the cost of everything from gas to bread are hitting as Fed rate increases drive up the monthly mortgage payment of the house they are hoping to land. 

In a new report, analysts at UBS translate the impact rising rates and inflation will heap upon the shoulders of beleaguered homebuyers into dollars and cents.  

Interest rates have been rising even faster than expected, with the average 30-year fixed interest rate hitting nearly 4.6 percent, the highest since the pandemic hit two years ago. 

The mortgage payment on the median priced home in the U.S. has jumped by a third since 2019, a combination of those rising rates and surging home prices, according to analysts at UBS. 

And those payments are about to go even higher. 

Slowdown’s ‘Silver Lining’ 

Even if home prices were to flatten out over the next few months all on their own – a highly unlikely development – another half-percent to 1 percent increase in interest rates could push those monthly mortgage payments up another 12 percent, according to UBS.  

Meanwhile, food and fuel costs have risen by more than $87 a month on average. For home buyers, that the equivalent to another 0.35 percent increase in mortgage payments, UBS analysts write. 

Or, to measure it another way, it’s equivalent to another $20,000 to $25,000 jump in the median home price. 

Scott Van Voorhis

The upshot? No one, including UBS, is predicting that home prices are about to crash. 

But the pace at which home prices have been rising has been unsustainable, and the combination of rising rates and inflation may be able to bring those increases back down to earth to more normal levels. 

And that, in turn, could keep the current housing cycle alive for longer than it would last otherwise by avoiding a nasty tumble from unsustainable heights, something UBS calls the potential “silver lining” to the spate of rate hikes and rising inflation. 

“We view the rate of HPA [home price appreciation] experienced over the past 18 months as unsustainable and believe the overall cycle could be extended with annual HPA that is closer to longer-term run rates,” analysts at the firm contend. 

Scott Van Voorhis is Banker & Tradesman’s columnist; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.