Thanksgiving usually marks the beginning of the slowest time of the year for the real estate market here in North Texas as attention turns toward the Christmas holiday. Real estate activity usually starts to pick up again in mid-January.

Here we are in mid-December and rather than cool down the local real estate market is actually heating up! What does that mean as we come to the end of 2021 and head into 2022?

Continue reading below, or watch the following video, to learn more.

We all know the real estate market has been on absolute fire for much of the past 18 months. After the anomaly of what we experienced in 2020, there have been several signs over the past few months that the market was returning to a more normal (whatever that means these days) seasonal pattern. While that is still true to a certain extent, the latest numbers show that the market isn’t ready for winter hibernation just yet.

Some of this late-year surge of activity probably has to do with the increase in mortgage rates we have seen over the past couple of months. Although rates did adjust down slightly this past week, many would-be buyers who haven’t been able to find a home appear to be trying to get one under contract before rates rise further.

The increase in activity isn’t isolated to just North Texas but is evident across much of the country.

ShowingTime is an appointment setting service that tracks showing activity across homes listed for sale across the country. The following graph shows the latest activity going back to January 2020.

The actual number on the graph doesn’t matter, just know a higher number represents a higher level of showing activity. The main thing I want to point out is that after declining in August and September, showing activity actually rose in October and surpassed the level of activity we saw in October 2020, which was already substantially higher than we usually see in October.

This wasn’t completely unexpected in 2020 as we lost the busy spring season to the pandemic lockdowns with that activity shifting to later in the year, but that wasn’t the case in 2021. Also, these are national numbers showing that activity across the country is running at an elevated level.

Inventory

The fact that showing activity remains elevated this late in the year means that inventory (supply) is probably not going to have an opportunity to replenish before we start the new cycle in January.

Low supply coupled with high demand is what has caused home prices to increase so rapidly over the past year. While the pace of appreciation is slowing as expected, it doesn’t appear as though the inventory issue is going to ease in the first part of 2022

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The following graph shows the typical cycle of new listing activity we see over the course of a year;

The light-colored lines show what we experienced in 2017, 2018, and 2019. All three years were very similar. New listings start to appear in mid-January, peak at the beginning of June, then decline through the rest of the year.

2020, represented by the orange line, started the year just like the previous years, but new listings plummeted as a result of the pandemic and never really came back. Demand for housing went up following the initial lockdown period, while supply went down resulting in rapidly increasing home prices.

When we overlay 2021 onto this graph the lack of supply becomes even more apparent;

2021, represented by the green line, started the year with substantially fewer homes for sale than we typically see. Although we did see listings climb slightly above 2020 levels, we have now fallen below 2020 levels and are likely to end the year with a record low number of homes for sale.

Where Have all the Listings Gone?

The question on the minds of many is when will the real estate market return to “normal”?

What the market needs now is inventory. While many would-be sellers delayed selling their homes due to safety concerns during the pandemic, others, when they felt comfortable enough to sell, found that there was nothing available to buy if they did sell. New information also indicates that due to rapidly rising prices, many sellers of “starter homes” (those homes typically bought by first-time buyers) decided to pull money out to use as a down payment on a new home and turn the previous home into a rental rather than sell.

The good news is that there were more new construction starts in 2020 than any year going back to 2006. While supply chain issues have delayed the completion of many of those homes, that inventory is starting to appear and will likely help bring a measure of relief in the first half of 2022.

Mortgage Rates

Historically low mortgage rates helped increase demand and offset much of the home prices increases we saw this past year, but rising mortgage rates and inflation are likely to take a toll going forward.

Inflation is running higher than expected and no matter how low mortgage rates are when the price of all other goods and services goes up the amount of disposable income people have goes down. Couple that with increasing mortgage rates and you will likely see demand for housing decrease slightly which will put downward pressure on the pace of appreciation. I’ll touch on that more in a moment.

Here is the latest forecast of what mortgage rates are likely to do in 2022;

Projected rates in the second half of 2022 have been revised upward slightly. Not a major change, but rather than reaching 3.5% in the fourth quarter they are now forecasting 3.7%.

Much like the years prior to 2020, I expect that we will return to a mortgage rate environment between 3.5% and 5%.

Home Prices

As mentioned above, rising mortgage rates coupled with rising inflation are likely to impact demand which will ultimately impact home prices. For anyone hoping for a price correction in the next few years, it doesn’t appear as though that is going to happen, at least not across the board in all markets. While nobody has a crystal ball and knows for sure, there is nothing in any of the leading indicators to suggest a price correction is on the horizon.

If that changes, I will be the first to let you know.

Currently, homes are expected to continue to appreciate, but at a much slower pace than we have seen over the past 18 months.

Millennials, the largest generation, are just now reaching prime home-buying age which will keep demand strong, while increasing supply is expected in the months and years ahead.

Here is the latest information from the Home Price Expectation Survey;

The median price of a home in January 2021 was $350,000. This graph is showing that over the next 5 years that home is expected to gain $111,285 in equity. You’ll notice the amount of annual equity gain slows as you go further out indicating a declining rate of appreciation.

Frisco, TX Market Snapshot

There are two things on this Frisco, TX market snapshot I would like to point out.

The Market Action Index provides a quick glimpse of how a market is performing. Think of the index like a speedometer, the further to the right the needle is the hotter the market is. Any reading over 30 indicates that conditions favor sellers. Nationally, the index is currently at 58. Here in Frisco, the current reading is 85, so an exceptionally strong market. While we would expect the index to fall this time of the year, last month’s index was at 81, so the market is actually strengthening.

As of last week, Inventory (the number of homes for sale) was 90. That is not a lot of homes for sale in a city the size of Frisco. To provide some perspective, in December 2018 there were 892 homes for sale, December 2019 had 731, and even December 2020 had 245.

Here is a link to the full Frisco Market Report. At the top of the report, you can use the search box to check the current market trends of any City or Zip Code in the country.

Bottom Line

The past 18 months have been challenging for anyone looking to buy a home, I understand that. In sharing this information I am not trying to say now is when you should, or shouldn’t buy as only you can make the decision that’s best for you and your family. I share this information to provide with you the facts, insights, and information you need to make that decision as there’s a lot of misinformation and false headlines out there.

If you currently own a home, there’s a good chance you have more equity than you believe. Click Here to use my equity checker to see how much equity you have built up over the past couple of years.

If you have additional questions, or a particular situation you would like to discuss in more detail, please feel free to Schedule a Call, as I’d be happy to talk with you.