• Hugh F. Wynn

America's Housing Market: Will the Bubble Survive 2022?

About six months ago, I wondered (in a blog): Is America's housing market bubble about to burst? The bubble has not yet burst..so the answer was no. So the follow-up question is: Can - and will - this dang bubble survive another year? NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion

Bizarre Bazaar

It’s amazing what can happen when the following factors all converge at the same time:

  • Low mortgage rates

  • Scarce new and used home inventories

  • Exorbitantly high lumber and building materials prices

  • A construction labor shortage

  • Rapid population growth (primarily in the warmer climes)

  • Frenzied investor home purchases

  • Ever-increasing rent rates

  • A persistent global pandemic

In 2021, it created an absolutely bizarre residential housing market. The looming question is: Will this combination of factors continue through 2022? Let’s consider what the future holds for this housing bubble by examining the past - meaning the 2021 housing market.


Record-breaking Demand

According to Washington Post writer Michele Lerner's article, 10 housing market records broken in 2021, in mid-summer 2021 the typical home sold within 15 days of listing, almost three times as fast as in the prior year. This was the lowest "median days on the market" rate in history. In addition, almost 60% of those homes sold for 3% over list price - another new record. Bidding wars for available homes were no doubt major contributors to these records. Expect more of this in 2022.


In 2021’s third quarter, corporate (and entrepreneurial) investors acquired over 18% of all homes sold, up 63% over the prior year’s third quarter. Yep, many homeowners answered the robo-calls from aggressive investors looking for homes to buy and added an unwelcome competitor to the mix for families seeking that first home or replacement abode. This significantly impacted residential housing demand in 2021.


Curiously, the demand for second homes in 2021 doubled over prior years - a trend that appears to be holding steady. Why? Wealthy investors are becoming wealthier, remote work is becoming “the new normal,” and mortgage rates remain low. This trilogy of factors has created an ideal situation for affluent Americans to buy second (or vacation) homes. However, a volatile 2022 stock market might slow this trend.


Great Resignation

Though it would not logically seem to be a factor, America's job "quit rate" in 2021, which was about 3% of the total employed population, had an impact on housing, too. Job changes played an important role in increasing – by over 20% – the number of people moving within and between metropolitan areas in 2021’s first quarter versus the year prior. That quit rate…and presumed salary enhancements…likely increased the demand for housing as more families qualified for mortgages. This may continue in 2022 as people keep quitting, finding new jobs and moving.


In addition to the “quit rate” and its impact on major metropolitan area housing, about 10% of the U.S. labor force worked remotely before the pandemic. That number has grown and is anticipated to swell to 25% in the long term. Such a development could result in waves of people moving to more affordable cities like San Antonio, Fort Worth, Phoenix and Charlotte. This would have a two-fold impact: An increase in home prices in population-absorbing cities and a softening of home prices in those tax-ravaged cities losing population.

Persistent Mortgage Rates

Different segments of the housing market benefited from low 2021 mortgage rates. In January 2021, a 30-year, fixed-rate of around 2.65% was a historic low. The current average rate on a 30-year fixed-rate mortgage is around 3.55%, low by historical standards, but up about 0.8% year over year. Still, it's considered a low mortgage rate and low mortgage rates increase buyer demand.


On the flip side, low mortgage rates encourage some families to consider refinancing or to remodel their homes rather than selling. In 2020, there were over 8 million refinances and another 6 million in 2021. Each borrower saved about $2,800 a year in lower payments, which freed up a collective $40 billion in cash flow to spend elsewhere. These homeowners, also blessed with 20% higher home values in 2021, will enjoy rate-reduction cash saved every month for as long as they keep their homes. In effect, they are experiencing a form of deflation through a combination of an increasing home valuation and lower mortgage rates.


Low mortgage rates impacted used-home inventory and has caused new home construction to lag behind demand for several years. But there are signs that new home construction is improving, particularly in several major southern cities. Increasing mortgage rates could accelerate this trend.


Rent Pressures

One’s personal inflation rate is often a function of timing and luck more than anything. Unlike homeowners seeking refinancing, folks currently renting or who are actively trying to buy a home are increasingly motivated by high inflation to do something now. In 2022, it’s likely that continued rental and mortgage rate increases will encourage prospective buyers (renters) to purchase homes as quickly as possible. In short, when it comes to dealing with Izzy The Inflation Monster, no one is average. An individual’s personal circumstances often determines his or her true inflation rate.


Rate Outlook

As mentioned earlier, in recent months, interest rates have inched above 3% but are still a bargain in the grand scheme of things. Expectations are that rates will remain under 4% in 2022. When compared to the onerous 18%+ mortgage rates in 1981 and more recent peak rate of 8.64% in May 2000, 4% looks like a steal. Still, the Federal Reserve is likely to impact today’s current rates when it starts matching wits with Izzy.


Depending on one’s perspective, those rate increases could negatively impact investors’ IRA and 401(k) equity valuations, reducing demand for big ticket items (like homes). And if, in 2022, mortgage rates and inflation continue to outpace wage gains, that, too, could curb homebuyers’ appetites. Perceived wealth (affordability) is always a challenge in the housing market. Still, demand and home price appreciation will likely continue at a healthy rate until more supply comes on the market.


2022 Housing Dilemma

Homeowners who “want" or "need" to sell face something of a dilemma right now. According to Redfin, the January 2022 median home sales price increased to $357,300, up 14% year over year. With the national median sales price rising, the temptation to sell is strong…until one is confronted with the cost of replacement. Homeowners typically need to occupy a replacement home 3-5 years to recoup closing and moving costs. And for those first-time shoppers, rising prices translate into higher down payments on top of closing costs that typically average 2-5% of the loan amount…more reason to get antsy about buying.


2022 Housing Outlook

2022's housing market will probably not break 2021's records, but it will continue to be a strong sellers market.


Zillow's economists made the following predictions:

  • The incredibly strong price growth and sales volume will continue. Zillow’s forecast calls for 11% home value growth in 2022. Existing home sales are predicted to reach 6.35 million, compared to an estimated 6.12 million sales in 2021.

  • Expect to see bidding wars on many homes, especially during the spring and summer shopping season.

  • The demand for rentals will increase as would-be buyers stay in the rental market longer - while searching for homes to buy.

  • As prices and mortgage rates rise, expect many homeowners to renovate their existing home rather than try to buy a new one.

  • Home builders are doing all they can to build new houses, but face supply chain snags and labor shortages. The housing shortage will be a defining feature of the market once again in 2022.

In Sum

Though a slight softening is occurring in some regional housing markets, in other rapidly-growing metropolitan areas - like Austin, Texas - the cutthroat, high demand/low supply scenario continues. And a wide chasm still looms between those wanting to acquire a home and those able to do so. In 2022, low, but rising, mortgage rates and the lack of available homes to meet that demand will probably continue to impact sale prices and buyer demand. In mid-2021, Freddie Mac estimated a national deficit of single-family homes of 3.8 million units, and Fannie Mae continues to forecast a 50% shortage. Even though buying a home has historically been an avenue to stave off inflation and accumulate wealth (versus renting), it’s worrisome that rent pressure, low inventories, bidding wars, and increasing mortgage rates might encourage first time buyers to panic and overpay, harming their finances long-term.


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