After showing a few signs of cooling in the fall, the local real estate market is now looking like it’s going to skip winter and head straight to spring as activity has been heating up again through the holidays.

In my real estate market update for January 2022 I’m going to focus on mortgage rates, yes they are rising, inventory, home equity, and we’ll close out by looking at what home prices are likely to do this year.

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

Mortgage Rates

If you happened to see last week’s video, then you might recall that mortgage rates have essentially been moving laterally since September. Up a little one week, then down, then back up, but last week they moved up more sharply. It’s possible that they could come down again, but overall it’s safe to assume we are entering an increasing mortgage rate environment and projections remain that we will end the year between 3.7% and 4%.

The question on many people’s minds is whether rising mortgage rates will negatively impact the housing market as we move further into 2022.

Here’s what Bill McBride of Calculated Risk has to say;

Bill always offers great insights and what he is saying here is that mortgage rates definitely play a role, but there are other factors to consider when looking at the overall real estate market, namely inventory.

Even though they are rising, mortgage rates have not yet reached the level they were in the years just prior to the pandemic so they have a ways to go before becoming the main driving force. Lack of supply (inventory) in the face of strong demand has played a bigger role in causing the market frenzy and rapid rise in prices we have been seeing.

Inventory

2022 has started with a record low number of homes for sale. The question now is how much further will inventory fall? Honestly, nobody knows for sure. In a normal pattern, inventory usually starts falling in the second half of the year and bottoms out in the second or third week of January.

Last year was an exception as inventory didn’t bottom out and begin to rise again until April. Maybe that was because the normal pattern was delayed 3 months due to the pandemic lockdown we experienced in the spring of 2020 or maybe this is a new normal. Time will tell and I’ll be watching this closely over the next couple of weeks to see if there are any signs of building inventory.

Here’s a look at the national inventory change from December 2020 to December 2021;

As you can see, the entire country, with the exception of Idaho, saw substantial inventory drops in December 2021 compared to December 2021. I’m not exactly sure what is going on with the Idaho market showing a 55% inventory increase. I can tell you that I worked with someone buying an investment property in Idaho in the fall of 2020 and there was virtually nothing for sale. With that in mind, if there were only 100 homes for sale and it goes up to 155 it would be a 55% year-over-year increase but still be considered an inventory deprived market.

If we go back to the original quote from Bill McBride, he mentioned that inventory, rather than mortgage rates, is what we need to keep an eye on with regard to how the real estate market performs in 2022. For inventory to continue declining, buyer activity needs to remain strong. For inventory to rise, we either need more supply, less demand, or a combination of the two. Currently, it appears as though demand will remain strong and could actually be increasing.

ShowingTIme is a service that tracks buyer activity across the country. Here is a look at homebuyer activity over the past 5 Novembers;

The higher the number, the more buyer activity. As you can see, homebuyer activity in November 2021 exceeded November 2020 and crushed what we saw in the 3 years prior to the pandemic.

Why is that and why is activity increasing as we head into winter?

Truth is, nobody knows for sure, but I speculate that buyers who’ve been sitting on the sidelines decided to jump into the market ahead of rising mortgage rates, or those that were hoping that a wave of foreclosures was going to bring prices down are starting to realize that isn’t likely to happen.

As the foreclosure moratorium ended there was speculation that distressed inventory would rise, but it hasn’t as of yet and none of the leading indicators show that it is about to. While there will be more foreclosures in 2022, since there couldn’t be any in 2021, there is no evidence there will be enough to impact the housing market in a negative way whatsoever. I covered this in detail in last week’s blog post, but rising home equity is a major reason why.

Home Equity Gains

For anyone that owns a home, record amounts of equity have been built over the past few years. Nationally, the average mortgaged home gained $56,700 in home equity between the 3rd quarter of 2020 and the 3rd quarter of 2021. For homeowners that were in trouble and entered a forbearance plan, there is a high likelihood that equity was gained even if the mortgage wasn’t being paid!

For example, let’s assume a homeowner has a mortgage payment of $2,000 per month and didn’t make a payment for 12 months. At the end of a year, they would be $24,000 behind on their mortgage plus late payments and fees. Even if we assume penalties totaled $6,000, if their lender added $30,000 to their loan balance, but the home gained $56,700 in equity, they would still end up $26,700 ahead. If their situation meant they could no longer afford the home, the home could be sold traditionally and all obligations paid off.

Here are the average home equity gains across the country;

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Home Prices

With supply remaining low and demand remaining high, what does that mean for home prices going forward?

I think we can all agree that the rise we experienced in home prices over the past year isn’t sustainable. While record-low mortgage rates helped keep affordability in check, rising mortgage rates and rising inflation will have an impact on the amount a buyer is willing and able to pay for a home.

We have already seen the pace of appreciation moderate and it is widely expected that will continue in 2022. Home prices here in Frisco rose rapidly between February and May 2021 but that upward trend flattened between May and September, meaning month-over-month prices were flat while year-over-year prices still showed gains. Prices did start ticking up again in late fall.

The pace of appreciation nationally has also moderated as shown on the following graph;

There are slight differences in how the year-over-year appreciation numbers are calculated between these three organizations, but you can see on the graph that all show the rapid rise in home prices peaked in July before starting to flatten out.

It’s important to point out that this graph starts at an annual appreciation rate of 10% so the flattening, or decline, you see in the graph doesn’t indicate home prices are declining but the pace of appreciation is declining.

Bottom Line

It looks as though 2022 is going to have similar conditions to what we saw in 2021, at least in the first half of the year, but I believe there will be a few differences.

More new construction inventory is starting to come to market and it is widely believed there is a pent-up demand of home sellers wanting to make a move which should bring additional inventory.

Buyer demand is expected to remain strong and I believe multiple offers and bidding wars will remain but do think the number of offers submitted per house will start to decline and don’t think the amount being offered over list price will be as much as we have seen in the past. I also believe the pace of appreciation will continue to moderate.

If you have a specific question or situation you would like to discuss in more detail, please give us a call at 888-447-9650 or email contact@s2realestateteam.com