2021 has been one of the best years for housing and one of the most difficult. 2022 won’t be that different.

Depending on your perspective, 2021 has been one of the strongest or most difficult housing markets in a generation. Through a series of government and private measures, house prices have posted their largest year-over-year increases, reaching all-time highs. In nominal terms, prices have catapulted past their 2006 peak, and are 10-15% higher after adjusting for inflation. In turn, housing options have shrunk to their lowest point in at least a decade, as measured by the National Association of Homebuilders and Wells Fargo, moving homeownership beyond the reach of many. American families.

Amid the vagaries of a supply-constrained market repeatedly rocked by the pandemic, October’s S&P CoreLogic Case-Shiller Index was 19.1% higher than a year earlier, just barely from its peak in August. For the same period, the housing price index of the Federal Housing Finance Agency (FHFA) increased by 17.4%. Although the pace of month-to-month appreciation has slowed, it remains close to double the long-term average and easily outpaces private sector wage gains.

Established coastal markets, including the Bay Area, Manhattan and Brooklyn, Los Angeles, Boston and Seattle, remain the most expensive markets in the country. However, the locations with the largest price increases reflect a change in regional dynamics, with demography and migration among the main drivers. The ranking of trending real estate markets is dominated by the Sunbelt, with Phoenix, Las Vegas and South Florida regularly. Not surprisingly, the South also experienced the greatest deterioration in affordability.

Winners and losers

For owners and sellers in the overwhelming majority of markets and submarkets, unprecedented price appreciation has translated into substantial gains in equity and revenue, respectively. Whether it’s a hold or a sale, both groups reaped the benefits in 2021. Supported by 30-year funding rates that have been below 3.0% for 31 of the 52 weeks of year (see Freddie Mac’s Primary Mortgage Market Survey), refinancing volume reached $ 1.6 trillion. during the first two quarters. While activity likely slowed in the second half of 2021, the resulting average annual savings on mortgage payments through June was over $ 2,800, with the largest increase in high-cost markets including Washington, DC. DC, New York, San Francisco, Los Angeles and Seattle.

On the other side of the deal, housing scarcity contributing to price appreciation has dashed the hopes of many potential buyers. An indicator of demand, the National Association of Homebuilders (NAHB) reported new records for traffic from potential buyers in each of the first seven months of 2021. While the bidding wars have subsided somewhat, potential homeowners still face significant competition from a range of market players, ranging from traditional home buyers relying on mortgages to cash buyers and institutional investors. Data provided by Redfin shows that national average sales-to-list ratios remain above 1.0 after moderating a summer peak.

Almost two-thirds of respondents to Fannie Mae’s Home Buying Sentiment Index think it’s a bad time to buy, a slight improvement from the record level of pessimism coinciding with Redfin’s market measure. Even so, 69% of those surveyed would buy rather than rent if they moved, remaining relatively stable even as their reading of the terms of purchase has weakened. The experience of rapidly rising apartment rents and low rental availability for almost 40 years is likely a behavioral factor in maintaining the stated preference for property.

Disparities in housing opportunities and security

Beyond averages, the past year has also reinforced disparities in housing opportunity and security and brought new research to contribute to our understanding of its mechanisms. Access to technology and the digital divide will exacerbate these differences as millennials grow as the share of homebuyers, the better-equipped taking advantage of a rich set of online tools to minimize search costs. for homes and mortgages.

The Census’ Household Pulse Survey, a vital new experimental tool for measuring the impact of the pandemic on households, shows wide gaps in housing security. For the period from December 1 to December 13, 6.9% of all homeowner respondents were not up to date with their mortgage payments. For comparison, although an apple to an orange in terms of methodology, CoreLogic’s most recent mortgage performance report shows that 3.9% of home mortgages were in arrears in September, on par with levels of ‘before the pandemic. The disparities appear when breaking down the Pulse figures: for households without children, the rate of “late payments” was 5.6% at the start of December, and 8.6% for families with children. For households with incomes over $ 200,000, the rate was 2.3%, but increased linearly with lower incomes, to 18.0% for the lowest income bracket. For white households, the rate was 4.7%; for Hispanic or Latin households, 10.1%; and, for black households, 15.5%. As this particular survey instrument was introduced in response to the pandemic, we cannot observe pre-pandemic levels for comparison.

Among single female heads of household (SFHOH) surveyed earlier in the year, Freddie Mac found that 57% of black and Hispanic renters are burdened with costs, defined as “not having enough to cover the basics of the household. payday life to payday “. Constrained in their ability to save for a down payment and faced with sharp increases in house prices, 60% of SFHOH renters of all races believe homeownership is definitely out of reach. In a separate report, Freddie Mac finds significant gaps in appraisals – the share of properties or applicants receiving appraisals below the contract price – when comparing predominantly minority and white census tracts. Critical to the validity of the results, the differences cannot be explained by a comparable sales analysis or a scenario where minority buyers consistently pay too much for their home.

Price increases lose momentum, but it won’t be easier for buyers

Many of the underlying conditions that determine house prices in 2021 remain intact in 2022. Modeling a wide range of scenarios for the macroeconomic environment, Chandan Economics’ benchmark housing forecast shows that price appreciation is slowing, but still exceeds household income growth. For first-time buyers with limited incomes, affordability will deteriorate further this year, even as supply constraints begin to ease.

Competing contributors to the forecast include a much-needed improvement in new home deliveries, a slowdown in this pipeline due to a shortage of skilled labor and land, measured increases in mortgage rates and higher sales volume, in particular. especially for new homes. Where traditional demand may weaken somewhat, it will be offset by increased competition from alternative and institutional sources of capital, including investors reallocating single-family homes to the rental market and localized increases in ‘buying activity’. “. Among the developments that could upset forecasts: the potential for significantly higher inflation and the policy response it would motivate, supply chain bottlenecks and serious setbacks in resolving the pandemic that could arise from variants with higher morbidity and mortality.

Chandan’s forecast broadly aligns with consensus projections, which show price increases to falter in the coming year, albeit with significant disagreement on the extent of the slowdown. Towards the middle of the forecast range, Freddie Mac’s October projections show an appreciation of 7% in 2022, up from 16.9% for 2021. Fannie Mae’s housing forecast for December calls for an increase of 7.4 % of the FHFA purchase index only. Average of Pulsenomics’ third quarter panel forecast shows Zillow’s home value index to rise just under 6% in 2022, with individual forecasts ranging from a 15% increase to pure decline. and simple 9%.

Comparisons to the real estate boom and slowdown of the previous cycle are to be expected given the breakneck pace of appreciation. But from a policy-making perspective, and in the absence of an exogenous shock to the economy, a correction in house prices that could jeopardize financial and household stability is a very outlier scenario. The thorniest issue is the supernormal appreciation rate which will fuel a further erosion of housing affordability and which could spur local and federal governments into well-intentioned but ultimately misguided and counterproductive policy interventions.

About Teresa G. Wilson

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