2022 Economic Outlook by Lawrence Yun

Home sales are at their best in 15 years.  Once all the data are tallied up, more than 6 million existing homes and about 800,000 newly constructed homes will have been sold in 2021 – the best performance since 2006.  The pandemic boosted housing demand as people sought larger homes in less crowded areas.  Mortgage rates averaged 3.9% in 2019 but have hovered near 3% since the onset of the pandemic, helping to lower monthly mortgage payments.  The interest rate drop represents $150 per month in savings for buyers with a $300,000 loan.  However, affordability conditions are changing.  Home prices have increased 25% since March 2020.  The $300,000 loan now turns into $375,000. Even with low interest rates, the monthly mortgage payments shoots up to $1,581. the initial relief brought by lower interest rates is wiped out by higher prices.  Thats why first-time buyers now account for less than 30% of home sales, down from 35% in the early months of the pandemic.  Homeowners nationwide have accumulated $5 trillion in equity during the pandemic, or around $67,000 for a typical owner.

This is not the end of it. Mortgage rates are set to rise this year.  4 million fewer Americans are working compared to before the pandemic.  The unemployment rate, though its back to normal levels, is less important measure because those who are not searching for a job are not counted.  The Red should be accommodative to keep pushing the economy along.  But the highest core inflation in 30 years is forcing the Fed to rethink its approach.  Reducing the purchase of mortgage-backed securities and raising short-term interest rates are inevitable.  The end result of these policy actions will be higher mortgage rates, around 3.7% by the end of this year.  At that rate, a $375,000 will translate to a $1,726 monthly payment.

Those pondering when to become homeowners will face higher mortgage payments. Rents accelerated in the late months of 2021, with government data showing a 5% annualized gain.  Rents will rise again this year and the following year, and on and on.  Thats because housing shortages are plaguing the entire country.  Aside from a few data anomalies associated with the pandemic-era eviction moratorium, current rental vacancy rates are essentially at a 40-year low.  Thats on top of all time low For Sale inventory.  Inflation will be with us throughout 2022.  Rising apartment rents have boosted multifamily property prices.  Home purchases for reasons other than primary residence rose to 17% of all transactions in October 2021.  Investors may have looked to the past to find that real estate is a very good hedge against inflation.

The combined impact of investor purchases and repeat buyer transactions will buoy home sales in 2022, even with rising mortgage rates.  Existing home sales are expected to fall by only 2% after a nice 14% cumulative growth in the past two years. Home prices will not fall and, in fact, will rise by 4% nationally.