Predictions for 2022
2022 Will Bring More Balance and Stability to the Industry
By Erica LaCentra
As we enter a new year, those of us in the real estate industry are anxiously waiting with bated breath and wondering what 2022 has in store. Will the market continue to blaze in its hot streak of momentous growth, or is it finally time for things to start slowing down? Many housing experts are predicting that 2022 will be the year that the market will start normalizing, but what exactly does “normalizing” mean though? The general consensus is that while experts anticipate that the market will begin slowing down from the frantic paces and high prices we saw ramping up in the spring of 2021, there is still the thought that prices will remain relatively high compared to where they sat pre-pandemic and inventory will continue to be tight. However, we will also see mortgage rates begin to rise and considering we have been experiencing an ongoing period of historically low rates, this is bound to have an interesting impact on the industry. So, what does this all mean for the year to come? Let’s break things down further.
Home Price Growth Finally Slows
Plain and simple, 2022 is probably still going to be a tough year for buyers. While home prices are not expected to climb in the coming year as rapidly as they did in 2021, just a modest 2.9% increase according to Realtor.com economists compared with an anticipated 12% rise in 2021, that does not mean that prices are expected to come down from the extremes they reached in the past year due to limited inventory and intense buyer demand. It is more accurate to say that home prices will begin to level out to a point where buyers will no longer see prices jumping up so quickly so at the very least there will be more consistency. However, with prices still remaining high and mortgage rates starting to rise, affordability will be a significant challenge and buyers will continue to face difficulties in a highly competitive market.
Inventory Problems Are Here to Stay for Now
Inventory, or rather lack thereof, was a real problem in 2021, and according to experts, inventory will remain limited in 2022. In fact, at the start of 2022, inventory is expected to be at record lows, at just under 300,000 single-family homes for sale according to a recent article by HousingWire.com, with even fewer single-family homes for sale than there were at any part of 2021 because of typical seasonal declines in listings in late November through early February.
Unfortunately, Realtor.com’s economists predict inventory levels across the U.S. will only increase by 0.3% in 2022, with single-family housing starts rising only 5% in the next year. These pitiful numbers are due in part to the difficulties builders are facing when trying to ramp up construction due to supply chain issues, and lack of materials and workers. Also, the desperately hoped-for flood of foreclosures that would come pouring in once government intervention expired never came to fruition.
Finally, demand continues to far outweigh the supply of homes for sale. The supply issues we are currently experiencing were already developing over the last five to ten years. There were substantial declines in new construction caused by the Great Recession that stretched into the present day. The pandemic simply exacerbated the cracks that were starting to show. So, we now have the Millennial generation at a prime home-buying age, and mass migration to the suburbs creating a perfect storm for long-term housing inventory issues.
Rates Will Rise
According to Freddie Mac data, in the first week of January 2021, the rate for a 30-year fixed-rate loan was at a low of 2.65%. Low mortgage rates have certainly been adding fuel to the housing market fire over the past year, so it is no surprise to most in the industry that rates are starting to creep up finally. As the pandemic has gone on, and the economy has improved, inflation has also reared its ugly head, and as such rates are expected to rise too.
Already by the end of November 2021, Freddie Mac had reported that rates were coming in at 3.10%, a 0.12% increase over the previous week. By the end of 2022, both Redfin and Realtor.com are predicting mortgage rates to hit around 3.6% for a 30-year fixed-rate mortgage, which ends up being substantial in the long run for an average homeowner. This just means owning a home will be that much more expensive and between the already inflated prices of homes, and now increased rates, buyers have their work cut out for them.
It is a Good Time to Own a Rental
Landlords will be pleased to hear that according to CoreLogic’s latest Single-Family Rent Index, the U.S. single-family rent growth increased 10.2% in September of 2021, which is the fastest year-over-year increase in over 16 years. As homebuyers are having trouble finding homes, the demands for rentals have also increased, sending rental prices soaring. Also, many individuals that have also opted to sell their homes during this time have chosen to rent because of limited inventory leaving much fewer rental vacancies as well.
So, it simply is another example of supply and demand. This is another area of the market where demand does not appear to be slowing down any time soon. Redfin is currently forecasting that rents will rise about 7% by the end of 2022, more than double their predicted 3% year-over-year home price growth.
Where are the Hot Markets?
While 2022 does not appear to have a lot of promise on the horizon for the industry, there are still markets throughout the country where opportunities abound. For real estate investors, even in the current competitive landscape, it just depends on what investment goals you are looking to accomplish. There are cities throughout the U.S. where there is money to be made whether you are looking to aggregate single-family rentals, flip distressed assets, or build larger-scale developments. You just have to know where to look.
For investors that are looking to make money by tackling inventory issues and building new homes, Southern cities such as Tampa and St. Petersburg, FL, Dallas, Ft. Worth, and Austin, TX, Atlanta, GA, and Raleigh, NC are ripe with development opportunities. Homes are in high demand in these areas of the country and still feasible compared to other parts of the country to be able to build and still turn a substantial profit even with supply chain issues that builders are facing.
For investors interested in single-family rentals, 2022 is going to be all about diversifying. As we see rates fluctuate, investors will want to make sure whatever they are buying that they are able to lock in and they are sure it is a good decision long-term. As we have already seen over the past year or so, investors will do best moving out of major markets and focusing on single-family properties in more suburban areas. Cities like Youngstown, Ohio; Springhill, Florida; Birmingham, Alabama; Cleveland, Ohio; Pueblo, Colorado; and Buffalo, New York, are all prime examples of cities that should be at the top of rental investors’ lists. With lower to moderately priced homes, higher rates of appreciation, and low rental vacancy rates, these are the perfect places to purchase a property that will build long-term wealth.
Bring On 2022
While 2021 proved to be a year of extreme highs for the real estate market, it seems like 2022 will bring more balance and stability to the industry and things will hopefully start to even out. With all indications that the market is on track to start correcting itself, only time will really tell if that ends up being the case.
