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Déjà Vu All Over Again

This piece originally appeared in the December 2021 edition of MReport, available here.

There are several factors at play right now that will reshape the housing market in 2022. At the forefront of these developing trends are rising interest rates and continued home price appreciation: two factors that can deter buyers from the market. If it weren’t for pent-up buyer demand, there might be a housing crisis afoot.

Mortgage rates hit an all-time low during the pandemic, leading to a boom in first-time origination and refinancing as buyers and homeowners looked to lock in savings. As we look towards 2022, there is one major factor at play that could shape the direction of interest rates: rising inflation.

In 2021, we saw a massive amount of inflation for the first time in years. Consumer prices jumped 2.6% in March, the biggest increase since August of 2018.

Rising inflation rates in 2021 are thought to be driven by a combination of things, including a reopening economy, increased demand for goods and services, and supply shortages for goods and services. Thanks to elevated inflation, coupled with rapidly dropping unemployment rates, the Federal Reserve will begin to taper its asset purchases by the end of this year and is likely to raise short-term rates by the end of 2022.

While inflation rates don’t have a direct impact on mortgage rates, there can be indirect effects because of the way inflation influences the economy. Mortgage rates are sensitive to economic trends, and if inflation is rising, mortgage rates tend to rise as well. It is likely that we will see mortgage rates rise, albeit slightly, with the 30-year, fixed-rate mortgage increasing to 3.8% by the end of 2022.

However, the dynamic built during the post-pandemic homebuying frenzy means that there is enough pent-up demand to sustain home sales even in the face of increasing interest rates and sustained home price appreciation.

 

No Sign of a Slowdown in Home Price Appreciation

Low rates cause demand to increase for new homes. This is generally a good thing for the market. However, increased demand combined with low supply has pushed up housing prices.

As of the end of July, housing prices have continued their streak, up 19% year over year. High prices have certainly pushed some would-be buyers out of the market. At the same time, mortgage purchase applications (a leading indicator) were 12% lower than the same week one year ago, according to a recent Mortgage Bankers Association (MBA) weekly survey.

There is little indication that this trajectory will reverse. Home price appreciation forecasts for 2022 call for continued increases. Goldman Sachs, for one, is predicting that U.S. home prices will soar another 16% through the end of 2022.

Inventory Shortfalls Will Improve
The silver lining is that inventory levels are rising again—up 30% since they bottomed out at a 40-year low this spring.

Then there is the possible inventory that could come to market as homeowners continue to exit forbearance. There are currently about 1.6 million homeowners in some phase of the forbearance process. More than half (850,000) will be exiting forbearance between now and the end of October. Some of these homeowners may try to take advantage of the market and sell their homes for top dollar.

We are already seeing defaults increase. According to ATTOM Solutions, default notices, scheduled auctions, or bank repossessions spiked 34% in this year’s third quarter. That momentum is likely to continue well into the new year, following nearly a year and a half of foreclosure moratoria. How much of a spike occurs will depend on how lenders choose to address distressed borrowers who are behind on their payments, but it is not going to be anywhere near the figures we saw during the great recession of 2009.

U.S. households are sitting on record levels of equity in 2021. As such, even suggesting we might see a collapse in the vein of 2009 is far-fetched. According to CoreLogic’s “Homeowner Equity Insights” report, U.S. homeowners with mortgages (roughly 63% of all properties) have seen their equity increase by a total of nearly $2.9 trillion from Q2 2020 to Q2 2021—a whopping 29.3% increase.

The increase in inventory has translated into a substantial decrease in the number of homes seeing multiple bids. With increased supply returning to the market, it’s likely that the home price bidding wars will continue to ease. This is by no means an indication of a bursting bubble; instead, think of it as the real estate market shifting to a more normalized pace.

How’s the Market Holding up Against the Pandemic?
The spikes in COVID-19 cases we saw in the second half of this year due to the delta variant have not had any additional impact on buyer demand. Buyers can continue to search for homes online, take virtual tours, and schedule tours (with masks) as needed. People who are concerned about high prices or safety have likely already stepped out of the market.

Going forward, if vaccinations prevent deaths, then businesses may never again see the full shutdowns of 2020. More people in the U.S. are willing to get the vaccine because of the variant; this could be a good thing if it prevents hospitalizations. Many are looking to the U.K.; with a similar percentage of their population vaccinated and facing a surge in delta variant cases, as of July 26, they were not seeing hospitalizations increase, according to the Washington Post.

The downside of this is that some are concerned that delta variants may just be the start of the mutations that could prove resistant to vaccines. This could push the U.S. into future lockdowns, though this would be a last resort; mask mandates may return (as we are already seeing in some regions), but few seem to have a taste for the full quarantines we saw in 2020.

Even with full shutdowns on the horizon, social distancing may limit growth in certain industries (especially hospitality). Additionally, if people become afraid to go back to more normal circumstances, this may affect both consumer demand and labor supply. The result could still create a lingering drag on the economy.

A rise in variants may also raise concerns about city living just as people were settling back in. This may increase demand for suburban and rural areas again. On the other hand, some may think that cities are safer; they tend to have higher percentages of vaccinated people.

Whether in the city or the country, buyers may be scared into avoiding home listings.

With uncertainty surrounding the future, they may want to stay put, and this could serve to reverse the improvements in housing inventory. If inventory levels shrink further, this would continue to pinch home sales, no matter how strong demand is.

In a worst-case scenario, if things go south because of a new variant, or if the U.S. and the world economy fail to recover, mortgage rates could again reach the low levels of 2020 and early 2021. This would likely result in another refinancing windfall for loan officers and the industry.

The more we look at possibilities and variables, the more it seems 2022 may prove to be a rerun of 2021.

About Author: Shashank Shekhar

Shashank Shekhar is an Amazon.com No. 1 best-selling author and the CEO of digital-first mortgage lender InstaMortgage, one of the fastest-growing private companies in America. He is frequently quoted in national media for his mortgage expertise. Shekhar has been named as one of the “most influential” and “most connected” mortgage professionals in the country.
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