It’s spring and that means the annual homebuying season is in full bloom.
But after two years of an unprecedented housing market, the housing landscape is shaping up to be a) more of the same; b) a return to normal; c) a downer or d) all of the above.
The answer may well be d.
The last two years have been nothing short of amazing for the housing market, as homes became the last refuge of a nation beset by successive waves of the coronavirus.
“From the shock of never-before-seen mass quarantines and towering job losses, to the eye-watering monetary and fiscal stimulus, American homes played a central role, serving as shelter, work places, virtual schools, gyms and safe havens,” says George Ratiu, manager of economic research at Realtor.com.
Existing home sales in 2021 were the best in 15 years, reaching 6.12 million. Prices followed suit, rising 19.8%. As for new homes, 770,000 were sold, though that was below the 822,000 of 2020.
For the market, it was a perfect storm. Record low mortgage rates and households flush with cash from savings and federal stimulus payments drew new buyers into the market while existing homeowners looking to move found willing buyers for their homes. Labor and materials shortages held back new constructions while tight inventories of existing homes for sale drove prices upward.
With demand remaining strong, sales could remain robust throughout the year and 2022 could be another good year. Some analysts believe, however, that a combination of rising mortgage rates and a decline in affordability will bring the market back down to earth – still healthy, but more in tune with pre-pandemic levels.
Political Cartoons on the Economy
If mortgage rates rise significantly and the economy slows as expected with a Federal Reserve bent on hiking interest rates to combat inflation, the market could cool somewhat. Mortgage rates are already above 4.5% on average for a 30-year fixed loan and expectations are they could hit 5% before too long.
It’s also entirely possible the market will see a combination of all three – a slower pace of sales, higher mortgage rates and a continued rise in prices.
“The housing market is expected to return to pre-pandemic, 2019 norms – at least in terms of inventory and the share of purchases made by first-time home buyers – by 2024,” according to a panel of housing market experts polled in the latest Zillow Home Price Expectations Survey.
The experts predict prices will rise 9%, below the 19% appreciation seen in 2021 but higher than the 6.6% the experts predicted as recently as late last year.
There’s no dispute that the demand is out there, driven by a new generation of homebuyers. As older millennials, those aged 32 to 41, reach the point where their career and family plans are starting to gel, they and younger millennials – 23 to 31 – now make up 43% of home buyers, the largest among the generations and up from 37% just a year ago, according to the National Association of Realtors.
And just as baby boomers defined the economy and the housing market before them, so too will millennials.
“Some young adults have used the pandemic to their financial advantage by paying down debt and cutting the cost of rent by moving in with family,” Jessica Lautz, the association’s vice president of demographics and behavioral insights, said in a statement accompanying the 2022 Home Buyer and Seller Generational Trends report. “They are now jumping headfirst into home ownership.”
Meanwhile, the boomers are cashing out, downsizing and moving to be closer with family and friends. And both generations are choosing suburban locations, 51%, and smaller towns, 20%, respectively.
But no matter where they choose to live, availability continues to be an issue, though there has been some improvement in recent months as sales of both new and existing homes have cooled off.
“The major issues holding back home sales are on the demand side,” Wells Fargo economists wrote last week. “Building material and labor shortages have led to uncertain completion times, which have forced most builders to limit sales to allow projects to catch up.”
New homes slowed 2% in February, to an annual pace of 772,000, down from 778,000 in January.
“We’re still selling 772,000 homes,” says David Auerbach, managing director of Armada ETF Advisors, which invests in real estate. “That’s a lot of new homes.”
Existing home sales, meanwhile, declined 7.2% last month, although prices rose at an annual pace of 15%.
“To date, we have seen more demand than homes,” says David O’Reilly, CEO of Howard Hughes Corp., which is developing large multi-use communities in Texas, New Mexico, Maryland and Hawaii.
O’Reilly says the demand for new homes today is “real” in contrast to prior market peaks where overbuilding and easy financing led to financial problems for lenders and builder bankruptcies.
Changing buyer behavior is a key factor behind the current boom, he adds, as buyers look for larger homes, shorter commutes and better work-life balances. That is fueling interest in smaller markets outside of major cities, as more people elect to work remotely in a post-pandemic world.
But affordability is becoming a bigger issue, says Odeta Kushi, deputy chief economist at title insurance company First American Financial Corp.
Kushi notes that a year ago, 31% of new homes sold were below $300,000. Today, that percentage has dropped nearly in half, to 18%. Overall, the median price of a new home sold in February was $400,600 – up 10.7% in a year.
“We need builders to build more homes simply because there remains a severe supply-demand imbalance in the housing market, driving up prices,” Kushi says. “However, builders face supply-side headwinds that make it more difficult and more costly to build. These costs are passed on to the buyer in the form of higher prices. In a rising rate environment, that makes affordability a big challenge for potential buyers.
Ironically, the rising prices and the higher borrowing costs could propel more buyers into the market this spring. Fear of missing out is a powerful driver of sales. At the same time, older sellers looking to move or downsize may see this as their best opportunity to get top dollar for their houses.
“For buyers and sellers, this spring will offer a period of transition, in which high prices will combine with rising interest rates to challenge budgets already contending with high inflation,” says Realtor.com’s Ratiu.
“The bottom line is that at today’s rate, the buyer of a medium-priced home is spending more than $300 per month more on their monthly payment than they did a year ago,” Ratiu adds.
Leave a Reply