What’s in store for the real estate market for the remainder of 2022?
Rising Interest Rates
As you’ve probably surmised by now based on the recent pronouncements from the Federal Reserve as well as the gyrations in the stock market, interest rates are on the rise.
Due to inflation concerns, a shift in the policy outlook from the Fed is suggesting far more rate increases than was expected which, in turn, is pushing bond yields higher.
For example, the yield on the 10-year US Treasury recently hit a high not seen since 2019 (as we went to print, the yield stood at 2.47%).
Meanwhile, the average rate on the popular 30-year fixed mortgage, which loosely tracks the yield on the 10-year Treasury, just surged to 4.72%, a level last seen pre-pandemic.
Economists had expected rates to rise only slightly this year but now that is changing, with the first three months of 2022 showing the biggest 3-month rate spike since 1994.
“Mortgage rates have a small chance to top out before hitting 5% and a good chance of topping out before hitting 6%, said Matthew Graham, chief operating officer at Mortgage News Daily.
Lawrence Yun, chief economist for the National Association of Realtors (NAR), now says he expects the rate to hover around 4.5% this year, after previously predicting it would stay at 4%.
Housing Inventory To Increase
The supply of available housing nationwide hit an all-time low of 1.7 months of inventory in February.
Yet, here we are in March and the national inventory of single family homes for sale, as shown in the chart, hit a record low of just 241,000, which is 21% lower than last year’s low point of 307,000 available homes.
We’ve seen this same pattern locally with the supply of all listed properties in Manhattan Beach, for example, sinking to 1.3 months worth of inventory in February (28 properties total). The situation has improved only marginally since then (34 homes, including townhomes and condos were available as we went to print).
As higher mortgage rates take hold, we fully expect inventory to increase by 50% or more later in the year. How soon we get there will be a function of how high and how rapidly mortgage rates rise.
Thanks to higher mortgage rates and higher house prices, sales of new single family homes unexpectedly fell in February.
Meanwhile, the NAR reported that total existing home sales (previously-occupied homes, including townhomes and condos) sank 7.2% from January and was also lower by around 2% on a year-over-year basis.
“That (high prices and rising mortgage rates) is a double whammy that erodes affordability for homebuyers, especially first-timers,” said Frank Nothaft, chief economist at CoreLogic. “First-time buyers are a sizable part of prospective shoppers and their share of purchases has slipped from one year ago.”
However, rising mortgage rates can also have a counterintuitive effect on the housing market. “Home shoppers are actually sprung into action in an attempt to buy a home before mortgage rates rise any higher,” says economist Ali Wolf. Consequently, she thinks the “downshift” in buyer demand will take time to get going.
In 2021, nationwide home prices jumped 18.8%, according to the S&P CoreLogic Housing Index (19.3% in Los Angeles), the highest calendar year increase in 34 years of data and substantially ahead of 2020’s 10.4% gain.
In case you’re wondering, last year’s winner among major metropolitan areas was Phoenix, with a whopping 32.5% median increase.
Look for home price appreciation to moderate significantly this year due to the impact of increasing mortgage rates on affordability. In fact, home sellers may already be adjusting their expectations as asking prices recently slipped slightly, according to Realtor.com.
The old adage, “Trees don’t grow to the sky” pertains here.
That being said, don’t expect home prices to fall this year. The reason? Inventory plummeted during the pandemic (see the chart above) and there simply aren’t enough homes for sale to match demand from buyers.