Real estate shock or a big nothing? Experts debate what rising mortgage rates will mean for the 2022 housing market

Federal Reserve officials were confident through the summer that spiking prices would reverse as the economy worked through supply and demand shocks caused by the pandemic. But that “transitory” narrative has been all but abandoned this month as the latest reading of U.S. inflation hit a 39-year high. Soon after that report came out, Fed Chair Jerome Powell acknowledged that stubbornly high inflation means that the central bank—which has a dual mandate from Congress to maintain maximum employment and stable prices—is more likely to “look at speeding up the taper.”

That statement got the attention of the real estate industry. If the Fed goes through with upping interest rates and reducing its purchases of mortgage-backed securities, it could result in higher mortgage rates. During the early weeks of the pandemic, Fed action pushed mortgage rates down to the lowest levels on record—which has helped to spur one of the most competitive housing markets in modern history. But rising mortgage rates would in theory do the opposite in 2022: They would put downward pressure on home price growth as some buyers get locked out of the market.

That said, there’s no consensus in the housing industry on how high rates will rise in 2022—let alone how much rising mortgage rates would do to cool off a housing market that is still red-hot. Some big players in the real estate market are predicting rising rates will cause something of a market shock, while others think the housing market is strong enough to absorb even a big uptick in mortgage rates.

The camp that thinks rising rates will shock the market a bit includes the Mortgage Bankers Association. The industry trade group, based in Washington, D.C., is forecasting that the average 30-year fixed mortgage rate (which is currently at 3.1%) will rise to 4% by the end of 2022. That rate jump, the group says, will help to push the median price of existing homes down 2.5% next year. That would represent a major reversal from the 19.5% jump in home prices we’ve seen over the past year.

But not everyone agrees with the MBA’s forecast—nor about the impact higher mortgage rates would have on home prices. Look no further than Fannie Mae, which is predicting the average 30-year mortgage rate will come in at 3.3% by the end of 2022.

The differences between the forecasts of the MBA and Fannie Mae are bigger than they might first appear. To illustrate: A borrower who takes out a $500,000 30-year fixed mortgage at a 3.3% rate would owe a $2,190 monthly payment. At a 4% rate, that payment jumps to $2,387—or an additional $70,900 over three decades. Not only would the latter burden price out more buyers, it would also lock some borrowers out of mortgage eligibility—given that loans are issued based on strict debt-to-income ratios. That explains why the MBA’s mortgage rate forecast coincides with its forecast that home prices will drop 2.5% next year. Accordingly, Fannie Mae’s forecast of a more mild jump in rates is accompanied with the firm’s forecast that home prices will jump another 7.9% in 2022—or almost double the average home price uptick (4.6%) the market has seen since 1980.

If a big jump in mortgage rates does come to fruition, it doesn’t mean we should automatically accept that we’re headed for lower prices. Nik Shah, CEO of Home.LLC, a startup that provides down payment assistance to homebuyers in return for a share of any profits from the home’s future resale, tells Fortune his firm is also forecasting mortgage rates will climb to 4% by the end of 2022. However, unlike the Mortgage Bankers Association, he says that “home prices will continue to increase [in 2022], just at a decelerated rate.”

How is it possible that home prices could still continue posting solid growth despite a theoretical big jump in mortgage rates? Shah points to the ongoing mismatch between supply and demand in the housing market. We’re currently in the middle of the five-year window (2019 through 2023) when the millennials born during that generation’s five largest birth years (between 1989 and 1993) will hit the all-important first-time homebuying age of 30. At the same time, those potential buyers are plunging into a market in which active homes for sale are at the lowest level in more than four decades. In total, Freddie Mac estimates the nation is 4 million homes short of current buyer demand. That dynamic—even in the face of higher mortgage rates—could keep this a seller’s market for years to come.

This story was originally featured on Fortune.com