2022 Housing Market Forecast: Are We Moving To A Renter Nation?
Goodbye homeownership, hello landlord.
After 70 years of propping up the homeownership rate with interest rate manipulation, the US is in a position to begin the reversion to a renter nation. That's right, fewer buyers and sellers and more landlords and tenants. I believe it is unavoidable and will not be stopped.
This is a comprehensive review of where the market is now, the market forces that are controlling the changes that we will see, and the likeliest path the market will take in 2022 and the years to come.
I hope you enjoy my forecast for the US housing market in 2022 and beyond, you will find that it's loaded with charts and graphs of the most important factors in the real estate market today. If you stick with me to the end, you will have a clear understanding of how the housing market will unfold in the months and years ahead.
US Housing Market Forecast 2022
Where We Are Now - It's All About Supply
Let's start by determining the present state of the US housing market. A simple look at the supply side will tell us a lot.
This graph plots the current supply of homes for sale in blue (measured on the left vertical axis) and then computes the relative supply of homes for sale in red (shown as months of supply on the right vertical axis). The white-dashed line shows the average relative supply of homes over time.
So what does this all mean? It means that the US housing market is severely undersupplied right now. The white-dashed line is approaching two months of supply, which means that on average, over the past twelve months, there have been just two months of supply of homes for sale in the United States!
Historically, most real estate professionals have felt that 6.0 months of supply is "normal," as at that level we have seen appreciation remain fairly stable around 3.5%. I have always felt the same, though I do believe the "new normal" will be lower than 6.0 months of supply now that the industry markets homes online. The ability to reach the majority of the market for a home no longer requires several months, so we could actually see the market equilibrium rate drop closer to four months of supply.
So if we use want to calculate the number of homes needed in the market right now, we merely take the average number of existing home listings over the past year (1,178,333) and multiple by 3 (if we believe 6 months of supply is equilibrium) or by 2 (if we believe that 4 months of supply is equilibrium). These calculations show that we are short by 1.2 to 2.3 million homes today.
Mortgage Interest Rates - #FOMO Heightens Demand
When we look to the other side of the supply and demand equation, we see strong demand. The number of home sales this year will not set an all-time high, though I believe it would have occurred had their been more available inventory.
This graph plots new home sales in red and existing home sales in blue, with 2021 estimates coming from statista.com and the national association of Realtors.
We can see that home sales have been robust, but perhaps not as frenzied as many would have thought reading all the headlines about an out-of-control housing market. If the year finishes as expected, 2021 will record the fifth-highest number of homes sold in the past 32 years.
The Supply & Demand Dynamic Is Unbalanced (BROKEN)
The result of low supply and strong demand is soaring home prices and soaring rents too. We simply do not have enough shelter for our growing population, and I am gravely concerned that home affordability is tanking for tomorrow's renters and buyers.
Anybody who has endured a basic economics class can tell you that when supply is low and demand is high, prices rise. The graph above shows that home prices are up nearly 14% in 2021 and rents have risen more than 8%. While we will cover prices and rents in greater detail below, you should know that the recent months' year-over-year gains in rents are now in the double-digits!
This graph shows out-of-control housing inflation that is going to price many people out of the market. This is not merely buyers, it is renters too. I believe the situation in housing is flying under the radar for most people, so there is going to be a shockwave when people realize they can neither afford to buy nor rent a place where they want to live!
So this is where the market is today. Soaring home prices. Soaring rental rates. Limited supply in both the "for sale" market as well as the "for rent" market. In our next section, we'll examine the market forces that have driven us to this condition.
Variables Controlling Change
You probably have heard the phrase that "real estate is local," and that is so true. The value of a home is directly related to the supply and demand for similar homes nearby. But that does not mean that global market forces don't have an impact on local markets.
Let's explore some of these market forces that will determine the outcome for the housing market in 2022. Just like everybody else, I do not have a crystal ball, so I want to share the variables that I have considered when formulating my US housing market forecast for 2022.
Starting with the demand-side of the market, let's first look at a major component of demand. People!
To forecast the future need for homes, we need to know many people are in the US today versus how many were here in the past. As you might expect, a growing population puts demand-side pressure on the market, while a receding population does the opposite.
The US population is growing! Today, there are greater than 35 million more people living in the US than there were when the housing bubble burst 15 years ago. This means we need more shelter to house them and we should expect more people (on average) to move every year.
The fact that today's housing market is not as robust as it was at times 15 to 20 years ago suggests that there is plenty of upside for the housing market if affordable solutions can be found.
The Post-COVID Economy
Will we ever truly be "post-COVID?" I have no idea, but I'm still going to use this label as we have seen a significant economic rebound since early 2020.
The health of the economy is a major variable for housing. If the economy tanks, so too will home sales. But if the economy improves, it is likely housing will as well.
This graph plots the participation rate for four key age groups in the US labor market. The "participation rate" is the percentage of people who participate in the labor force (meaning they either have a job or are looking for a job).
Look at the labor force's reaction to the pandemic in the first half of 2020. All four age ranges saw an immediate and sharp decline in the percentage of participants in the workforce. Since that time, the vaccination period responses have had differing reactions.
The 55 & Older age range (the purple line in the graph) has seen a continued decline, causing some to speculate that its group is led by a wave of early retirees. On the other hand, the 25 to 54-year-old group (the green line in the graph) is just slightly below its pre-pandemic level, and this is the group that most influences the housing market.
People aged from 25 to 54 represent the largest housing-market active segment of our population, and the fact that this age group had only a slightly negative response to the pandemic in the labor market is one of the primary reasons the housing market is still going strong.
Inflation And The Fed Funds Rate
We know there is inflation in real estate right now. Any prospective buyer or tenant will tell you it is crazy out there. But how about the rest of the economy? Have you been keeping up with the change in the inflation rate and how the Fed is responding?
Our Federal Reserve Board controls monetary policy and serves to keep stability in the economy. As an oversimplification, it uses interest rates as a device to speed up or slow down the economy, based upon what they are seeing with inflation.
The following graph shows two separate measurements. On the left side, we measure inflation in the blue shaded area. On the right side, we record the Fed's response (the effective Federal Funds Rate). Historically, when the blue starts going up, the red will rise. When the blue starts to decline, the red will fall. But is that what we are seeing now?
Inflation, the blue area, is rising towards 7% year-over-year growth, yet the Fed Funds Rate hasn't budged. Just look how much higher the blue area (inflation) is right now versus any time in the past ten years. Inflation is running higher.
I have said this before, but it is worth repeating. The Fed is trapped right now. It has competing interests. It needs to raise the Fed Funds Rate to cool the inflating economy. But at the same time, it knows if it raises rates rapidly, it could shock the economy and slow or kill the recovery for the remaining sectors. Soaring rates would put a freeze on buying in the housing market. So the Fed holds while claiming that this spike in inflation is just temporary. I'm not buying it.
Mortgage Interest Rates - #FOMO Heightens Demand
The surge in home sales over the past two years has been heavily fueled by low-interest rates in the mortgage market. Rates hit an all-time low about a year ago, and now we have buyers with a fear of missing out on the lowest mortgage interest rates they will see for the rest of their lives.
To piggyback on the previous graph, let me share with you an ominous graph that should send shivers to your soul (OK, a bit overdramatic, but not by much!).
Don't let this graph overwhelm you, it appears to be really busy, but it is just a comparison of two different trends. The key is to focus on the dotted lines, and specifically, the highlighted dotted line.
The red dotted line shows the one-year average of the Fed Funds rate, while the blue dotted line shows a one-year average of mortgage interest rates. Finally, the black dotted line (highlighted in yellow) tracks the difference between these two trends, and the highlighted trendline is the one we really want to know.
The mortgage market (generally) follows the Fed Funds Rate, and we typically see the 30-year fixed mortgage rate hover between 3% to 4% higher than the Fed Funds Rate. Today the Fed Funds Rate is between 0.00 and 0.25, while today's 30-year fixed mortgage rate is 3.16%. So here is why this graph should shake you to your core.
In an opinion published this past summer, one Fed committee member said using the traditional model for determining the proper Federal Funds Rate, today’s rate should be close to 5%. If the Fed acted on that, a federal funds rate of 5% would suggest mortgage interest rates moving above 8% over the next year. While I do not expect that to happen real soon, we do need to know that the Fed cannot (and will not) sit on their hands forever. I am expecting a rise in the Federal Funds Rate early next year and that means we should anticipate a rise in the mortgage interest rates to follow.
Demand-Side Variables Expose Opposing Forces
As we take in the totality of the variables controlling demand in the housing market, there is strong evidence supporting both a growth and a decline in the demand for homes next year.
On the one hand, scarcity is still very strong and there is a growing list of people who have tried and failed to obtain housing this year. The population is growing, the economy is recovering, and the strongest segment of the economy includes the age group of people who buy and lease homes.
On the other hand, we have mortgage interest rates. The Fed has used a low Fed Funds Rate to fuel economic recovery from the pandemic, but the writing is on the walls. The Fed cannot allow runaway inflation, and that is what we are starting to see. The Fed will raise rates, and mortgage interest rates will follow. And that will bring the market to a "double-whammy" against home affordability.
When prices are rising and mortgage interest rates are rising at the same time, it makes homes far less affordable at a very rapid rate. Buyers have to pay more for the home and then simultaneously pay more for the money to purchase the home. Here's how prices and interest rates rising concurrently stifles the demand for homes:
Buyers typically take around 9 months to buy a home, from the time it becomes a conscious thought to make a move, until the day they close. So a brand-new buyer today would find homes that fit their budget and begin shopping.
Nine months from now when they are preparing to close, the homes (on average today) will cost 10% more and interest rates will likely be up by at least 1/2%. For somebody looking at a $300,000 home today, the monthly payment when they close nine months will have risen 17%! This will force buyers to lower their expectations or prepare to pay more money, and in my experience, neither one of those has a positive impact on demand.
Now I think the market can handle a 17% negative swing in home affordability, but what happens to that monthly payment if the Fed is forced to really combat inflation? What if the Fed Funds Rate explodes higher and suddenly we are dealing with mortgage interest rates in the 4%, 5%, or even as high as the 8% range? That would be a level of sticker shock I would not want to see.
At the beginning of this report, we examined the current historically low supply of homes for sale and the parallel low supply of homes for rent. Our growing population needs shelter, and the lack of supply of shelter has caused toxic inflation on both sides of the housing market.
I do not believe the traditional press has really picked up on this, but housing could easily move to the top of their commentary when we start to see the homeless rate rise. In fact, according to Statista, homelessness has been rising for the past two years. What do you think will happen (soon) with both rents and prices each exploding higher?
The supply of homes for sale comes from people moving or dying and from the new construction of homes. Without getting dark in this report, COVID could have had a positive impact on the supply of homes had the mortality rate been much higher. Fortunately, it did not. With a growing population, we need to see growth in the construction of new shelters, both multifamily as well as single-family too. But that is just not happening.
With a growing population, we need to see growth in the construction of new shelters, both multifamily as well as single-family too. But that is just not happening.
Housing Starts & Home Builder Issues
This graph tracks new housing starts over the past 63 years and it illuminates the categorically low rate of new home creation we are seeing today.
The blue area measures the housing starts, the new residential construction projects that began during each month. The red shows the linear trend of new housing starts, and it is declining.
The table below the graph shows twenty years from the past 63 years that all had more housing starts than 2021 and then shows how today's population has grown compared to that year. For example, at the far left of the table, there were more housing starts in 1963 than there were in 2021, yet our population is 76% larger today than it was in 1963. Think about that for a moment. Does our current rate of homebuilding make sense at all? It’s no wonder that existing home prices have moved so high.
The new-home-construction trend shows a decline over the past 63years, even as our country has grown significantly. That didn’t make sense to me so I played around with the trend line and found that the linear trend on this graph was actually rising at a rate parallel to population growth from 1959 through 2008. It has been the slow rate of new construction over the past 13 years that has caused the supply problem in the housing market!
********** IMPORTANT POINT HERE **********
In 2006, the "for sale" market was stalled when many loan programs were taken away and others were "tightened up" in an attempt to lower the default rate. With the flow of money stopped, buying was cut in half and new construction projects around the country drove up the supply of homes.
At that time, we all thought the market was "over-built." We were wrong. Now, if you were a home builder or a Realtor trying to earn a living selling homes, you saw the inventory everywhere, so this was a valid (but ignorant) conclusion. To better understand the totality of what was occurring, we should have taken a look at the impact on rents..
Even as investors swooped in and purchased cheap homes, the "for rent" market did fine and rents were stable. What we saw was the decline in the "for sale" market, what we failed to acknowledge was the rise in the "for rent" market. When the government changed the rules on borrowing, we saw demand shift from the "for sale" market to the "for rent" market.
Over the years, housing starts fell to anemic levels and the inventory slowly shifted from the "for sale" market to the "for rent" market. Equilibrium was reached in the "for sale" market by 2016 and lending standards softened. Since that time, we have seen both rents and prices move higher, yet new construction has not resumed its normal rate. In fact, the lack of construction has created a void in the supply chain for housing, so we're seeing both rents and prices soar.
The lack of new home construction is the reason the graph above shows a negative trend line for new homes instead of the generally rising line we would have observed had we only run the trend to 2008. America needs homes built to keep up with the growing population, and it has to step up the pace in a dramatic fashion. We are many millions of homes behind due to the post-housing bubble response of the market.
A Quick Shout Out To Kevin Erdmann
If you want a radically different understanding of the housing bubble, I strongly recommend that you follow Kevin Erdmann @KAErdmann on Twitter and read his book (SHUT OUT: How a Housing Shortage Caused the Great Recession and Crippled Our Economy).
The red line is the number of housing starts required to meet population growth and replace old units. The blue line is other starts.— Kevin Erdmann (@KAErdmann) November 9, 2021
First graph assumes 0.2% replacement rate, second assumes 0.5% replacement rate.https://t.co/G1PfVwX2Yjhttps://t.co/GbusiryRLp pic.twitter.com/EetBQ7uClU
Foreclosures & Forbearances
The darling of the doomsayers on YouTube never came around this year. We were warned that foreclosures would cause a housing bubble. They did not. We were warned that loans in forbearance would swamp us too. They did not.
Distressed properties just did not live up to the hype in 2021, so let's examine where we are today with mortgage delinquencies.
This graph shows home loan delinquencies, meaning the number of mortgage holders who are late on their payments. Those that are 30 days late are plotted in blue, 60 days late are plotted in red, while those who are 90 days late or longer are plotted in gray. The green-dashed line plots the percentage of all mortgage holders who are late.
In 2010, nearly 11% of all mortgage holders were late on their payments. The market has been recovering each year until we hit the spike in 2020 caused by the arrival of COVID. The pre-covid delinquency rate was just over 3%, then suddenly it shot up to 6%. This spike brought out all the "experts" calling for a housing market collapse.
As we have seen, no collapse ensued. The delinquency rate has dropped below 4% and is improving rapidly. During this same time, the loans in forbearance have dropped from several million to right about 1 million today. Many of these are on a schedule and the loan servicers are working hard to restructure the loans.
Housing Equity - Why There Was No Foreclosure Crisis
When the foreclosure count blew up last year, some of the most prominent real estate reporters were claiming we were heading to a foreclosure crisis. I knew (and reported) that it wouldn't happen. Why? Because there is so much equity in the housing market.
This graph plots the aggregate home equity in the US housing market in blue along with the aggregate mortgage debt in red. The equity growth is running far faster than is the debt.
Look back in 2008 through 2010 when foreclosures were streaming into the market. The debt in the market far exceeded the equity, so these homes were upside down on their loans. Additionally, they entered a market that was already oversupplied for the low demand (caused by the tightening of loan qualification requirements.
Contrast that with today, where equity is running at about 27% for US home values. This means that distressed properties can enter the market, not as foreclosure sales, but as arms-length home listings. The majority of these sellers can sell the homes, pay off the debt, and walk away with some money.
So long as we are in an undersupplied housing market, equity growth will continue and there will be no threat from distressed properties. In fact, most foreclosures will be well-received by the market and most will sell with bidding wars taking place for the right to buy these homes.
The 'For Sale' Market Does Not Stand Alone
When the housing bubble burst back in 2006, we all thought it was due to a gross oversupply of homes. But that was not the case. That was a symptom in the 'for sale' market that was not mirrored in the 'for rent' market. So as not to make the same mistake, I like to track rental rate changes to see if the lack of supply on one side of the market is leading to an excess in the other (or if they are moving in the same direction).
This graph plots the change in home prices and rental rates in the United States since 2015. The home price index is shown in blue while the rental index is shown in red. Currently, homes are appreciating at just under 14% per year while rents are moving higher at more than 8% annually.
If we dig down further into rents, we see that recent months show rents growing even faster.
When 2021 began (and through the first half of the year), rents were growing from 2% to 4% year-over-year. But once we hit the summer, rents started to move higher fast. In November, rents rose nearly 13% when compared to November of last year.
So it is clear that both the price of buying homes, as well as the cost of renting homes is moving higher at alarming rates. This is due to the limited supply of homes available in each respective market.
Keep Up With New Trends In Tallahassee!
Get The Tallahassee Real Estate Newsletter
Don't be the one that doesn't know what's going on when you sell a home or buy a home in Tallahassee.
Other buyers, sellers, lenders, and real estate agents have this critical information, and now you can too!
Get immediate access to our most recent newsletter.
Let more than 30 years of experience work for you with charts, graphs, and analysis of the Tallahassee housing market.
The Likeliest Path For The Housing Market
We have addressed the current state of the US housing market, and we have reviewed the key market forces that will shape the landscape for both the 'for sale" and the "for rent' markets in 2022 and beyond. I guess this means it's time for me to share my forecast for the US housing market.
The two biggest issues facing the market are the creation of new homes and the availability of low-interest mortgage loans. We need builders to explode new housing starts, and we need interest rates to remain relatively low to allow buyers to consume the new inventory. So how do I see this playing out?
It all starts with inflation. I believe that inflation is running a lot higher than the Fed is willing to admit or react to for now, and I think the Fed's hand will be forced in 2022. I'm not wise enough to tell you how strongly the Fed will respond, but the health of the housing market requires rates to rise only marginally over time. I'm not so sure that will be possible though.
The Fed's reaction to inflation will lead to a chain reaction in the mortgage market, and I'm fairly confident that the days of 2% money are behind us and I'm concerned that so too are the days of 3% money. If we can keep rates below 4% for the entirety of 2022, I think the housing market will be able to keep churning along, albeit at a slower rate.
My forecast is for discretionary demand to fall. I expect total home sales to decline by 5% to 10% in 2022, and this is based upon my belief (hope) that the Fed doesn't follow its traditional model of stemming inflation. As rates rise, home affordability will decline, sticker shock will set in, and discretionary demand will recede.
I truly believe that the question of falling demand is "when; not if?"
Many would-be buyers will be pushed to the rental market, yet supply there is limited too. Many traditional "move-up" buyers will simply stay put, and both markets will constrict to mostly non-discretionary consumers. It will be the discretionary buyer leaving the market that causes the decline in demand.
Despite the reduction in discretionary spending on housing, the resulting demand will still leave the market short on inventory. Rents and prices will move higher, and the pace will be determined by the speed at which mortgage interest rates rise.
Perfect Conditions For The "Amazon Of Housing"
High costs and high rents have created an opportunity for a large, well-funded organization to get into the creation and leasing of residential properties. Think of it as the "Amazon of Housing."
The barrier to entry is going to swing the market away from homeownership and back towards a renter nation. A larger percentage of one's income will be required both for owning and for leasing, so it creates a great opportunity to amass the largest pool of residential properties and to wrestle some control over the decentralized housing market.
This is happening at a smaller scale in many areas of the country, but a giant could come in and completely reshape the residential property world. Now, I’m not saying this will become a fact in 2022, but I do believe it is starting now. The long-term future of housing will see some centralization of housing costs and controls.
If you are in a position where you did not plan to move until the next stage of your life, I would urge you to reconsider. Based upon the relatively low price of homes today, coupled with mortgage interest rates still remaining near record lows, I would recommend you consider creating a more long-term solution to your housing needs if possible.
The higher cost of homes and the higher cost of money might make the future move something unattainable. If you are happy where you are, speak with a mortgage lender about a refinance, as this is the cheapest money you will see for the rest of your life and it is well below the current rate of inflation.
Post a Comment