The Housing Market
A Look Back at 2021, A Look Ahead at 2022
By Rick Sharga
As the year comes to an end, it’s time to take a look back at the real estate market in 2021 and begin thinking about what might be in store for 2022.
The Housing Market Continues to Thrive
Despite historically low levels of inventory, the housing market had an exceptionally strong year. Existing home sales will likely exceed six million, and new home sales will finish the year around 800,000 – both higher numbers than 2020 sales, and both actually suppressed by the stubbornly low number of homes for sale.
Inventory of existing homes for sale across the country averaged between 2.5 and 3.0 months of supply, less in some high demand markets like California, where inventory was often 1.5 months or less.
In a normal, healthy market, inventory levels are typically six months, so the shortage of homes for sale was very real and had a huge impact on the market. New home inventory was slightly better, at one point almost reaching the six-month mark, but as builders faced shortages due to COVID-19-induced supply chain disruption, construction slowed noticeably, and inventory levels plummeted.
Builders also slowed down the sales of under-construction homes due to uncertainty about the availability of supplies like windows and roofing materials, and extreme volatility of material prices.
Housing starts and permits have been strong for the second half of the year, and assuming that supply chain issues and labor shortages can be addressed, more inventory should be coming to market in 2022 and subsequent years.
Strong Demand Drives Price Appreciation
Demand for homes remained extraordinarily strong. According to the Mortgage Bankers Association (MBA), purchase loan originations will set a record in 2021 at $1.6 trillion and grow from there in 2022.
What’s driving the demand? Demographics is the biggest driver and will continue to be for the next few years.
The largest cohort of Millennials – the largest generation in the history of the USA – is rapidly approaching the prime age for first-time homeownership. So new home buyers will be entering the market in large numbers for at least the next 2-3 years.
Historically low interest rates have also been a demand driver. With rates hovering at or just below 3% for a 30-year fixed-rate mortgage, it’s often less expensive to make a monthly loan payment than it is to pay rent in many markets across the country. And the COVID-19 pandemic has also contributed to unusually strong demand, partly by accelerating a trend that was already happening (urban renters becoming suburban homeowners) and partly because of the desire to find “healthier” environments and the ability to work from home.
The supply/demand imbalance has driven prices to record levels – almost $353,000 for existing homes and almost $409,000 for new homes at the beginning of the fourth quarter of 2021.
Home price appreciation has routinely been between 15-20% on a year-over-year basis for the second half of the year, causing fears that the market may be entering into “bubble” territory, but most economists believe that price appreciation will moderate in 2022, while still being slightly higher than the historical average of 3.5-4%. This price appreciation has resulted in the highest level of homeowner equity ever, some $23 trillion dollars.
No Foreclosure Tsunami Yet, and One Not Likely Next Year
The doom-and-gloom predictions of a massive wave of pandemic-driven foreclosures turned out to be completely off the mark in 2021.
A recent report from RealtyTrac’s parent company ATTOM Data Solutions noted that foreclosure activity in the third quarter of 2021 was up 34% from the previous quarter and 68% from the third quarter of 2020. But the report also noted that foreclosure activity was down by 60% from the same quarter in 2019, when foreclosure activity was at more normal levels. And it is unlikely that the number of properties in foreclosure will return to normal levels until late in 2022 at the earliest.
While the number of delinquent loans soared early in the pandemic, those numbers have declined over 41% since September 2020, and the number of seriously delinquent loans – borrowers who are at least 90 days past due on their payments – dropped by over 1 million during that same time period. At the end of October 2021, overall delinquency rates dipped below 4% for the first time since prior to the pandemic.
The MBA believes that delinquency rates will continue to decline as the economy recovers and unemployment rates fall.
According to the MBA’s Chief Economist Michael Fratantoni, “The delinquency rate tends to be highly correlated with the unemployment rate over time. This was certainly true over the past year, as unemployment spiked during the onset of the pandemic, then has fallen rapidly as the economy has re-opened and rebounded. Our forecast is for the unemployment rate to continue to decline, reaching 4.5% by the end of 2021, and likely dropping below 4% by the end of 2022. The delinquency rate should follow that downward path closely.”
Mortgage delinquency numbers have also been inflated by the forbearance program, with over 1.2 million borrowers still in the program entering the fourth quarter of 2021.
While none of the borrowers in the program are being reported as delinquent to the credit bureaus, no payments have been received on their loans, so the loans themselves show up in the industry’s delinquency reports. Many industry analysts predicted that the majority of borrowers entering the forbearance program would eventually default on their loans, creating a new wave of foreclosures. So far, that hasn’t been the case at all.
Two important points to take away here: First, less than 1% of the borrowers who entered and exited the forbearance program did so with a deed-in-lieu, short sale or default. Second, during the time when the 6.8 million borrowers in forbearance cycled in and out of the program, delinquency rates consistently declined, strong evidence that the borrowers who have exited the program have been able to do so successfully.
There’s simply no data that suggests the market might experience a large uptick in foreclosures in 2022. The length of and repayment terms offered in the forbearance program have made it possible for millions of borrowers to work their way through the pandemic without defaulting on their loans.
Record equity will give borrowers the opportunity for a soft landing if they need to sell their homes in order to avoid a foreclosure, and the huge supply/demand imbalance in the market suggests there will be buyers – both consumers and investors – ready and willing to buy these properties as they become available.
