Windermere Chief Economist Matthew Gardner outlines the 10 trends that will have the biggest impact on the real estate industry and markets across the country.
BY MATTHEW GARDNER
Last year, I put together a top 10 list of things to be on the lookout for in 2021. I decided that an update was in order so, without further ado, here is my list of things to be on the lookout for in 2022.
1. Home prices will continue to rise
Now, most of you are already saying to yourselves, “well that isn’t much of a surprise,” but it is worthy of making it onto my list as whispers have been growing louder from some who believe that we are set for home prices to drop given the extremely rapid pace of growth we saw last year.
I certainly don’t see prices falling this year, but I have no doubt that the pace of appreciation will slow significantly. In fact, I expect home prices to rise by around 6 percent versus 16 percent in 2021.
The primary reason for this slowdown is that we are testing affordability levels across much of the country — and not just in the markets you would expect to see affordability issues such as Los Angeles, San Francisco, New York, Miami, or even here in Seattle. The share of households making local median income who are able to afford a median-priced home has dropped significantly in areas that you would not expect.
Here I am talking about markets like Corvallis, Oregon which was — technically — the least affordable market in the country in the third quarter of last year. Also pretty high on the list of unaffordable markets were Salem and Eugene — also in Oregon; Boise, Idaho, as well as Tacoma and Bellingham here in Washington State.
The bottom line is that some of the heat will come off the market this year with price growth slowing — and listing brokers need to be positioned to explain this to their clients who have become very accustomed to seeing prices spiraling upward. Those days, I am afraid, are highly likely behind us — and that’s not a bad thing.
2. The spring buying season may come earlier — and be bigger — than you are expecting
As I suggested several times last year, the work from home paradigm is real — and I see this potentially increasing buyer demand for several reasons.
As we all know, many companies were planning to announce their work from home policies after Labor Day last year; however, the rise of the Delta variant of COVID-19 forced them to delay their decisions until the start of this year. Assuming that they don’t further postpone implementing new policies due to the Omicron variant, workers will get more clarity regarding work from home.
When they do find out exactly how often they will have to go into their offices, I see many of them immediately start to search for new homes that are likely to be further away from their workplaces, and into more affordable markets.
I also expect some to start looking for a new home not necessarily because of price, but because their current homes just aren’t equipped for remote working.
So, my advice would be for you to prepare for what could be a very robust — and possibly exceedingly early — spring buying season.
3. The rise of the suburbs
For a significant percentage of employees whose jobs do allow them to work from home, remote working will not be an all-or-nothing proposition. Rather, it will be a blend of working from home a few days and in the office for the balance of the week.
This will lead would-be buyers to target locations that are still relatively proximate to their offices, but away from high-density areas and into the suburbs or other exurban markets that aren’t that far away from work.
We are already seeing signs of this. I have taken a close look at records from the postal service — who have a trove of data from people submitting change of address requests — and it showed me that, so far, 84 percent of households who have already moved actually stayed in the same metro area as their old home.
Of course, some will be able to work from home permanently, and this will allow them to look even further afield, so I also expect to see greater interest in secondary and tertiary markets that had previously been generally overlooked.
Big gainers here will be areas like Breckenridge, Colorado; Payson, Arizona; The Dalles and Astoria in Oregon; Wichita Falls, Texas — and believe it or not — Spenser, Iowa.
These are locations that will certainly benefit economically from the influx of new residents, but I would offer a word of caution. As buyers from high-price locations move into these markets and snap up what they believe to be relatively cheap homes, it will push prices up significantly and this can hurt existing residents who had always thought that they would be able to buy a home when the time was right. This veritable wave of “out-of-towners” may well start to price them out of the towns that they grew up in.
We are already seeing this in markets such as Riverside CA where buyers leaving the Los Angeles basin are snapping up homes. This has impacted affordability which is down to just 26 percent or, as we just discussed, Corvallis, Oregon, where just 6 percent of homes sold in the third quarter of last year were technically affordable to households making median income. That’s pretty scary.
4. New construction jumps
I am looking for the cost of construction to come down a bit this year as inflation finally starts to taper. This should provide additional stimulus for homebuilders to start the construction of more units.
Material costs spiked through the COVID period with lumber prices alone adding about $36,000 to the price of a new home, but this year I’m hopeful that the bottlenecks in the supply chain will be fixed, prices should then start moderating and this will flow through to building material costs which should also start to drop.
Because of this, I anticipate single-family starts to come in at around 1.22 million units this year and 1.24 million in 2023. These are numbers that we haven’t seen since 2005.
5. Big push to address zoning issues that limit development
Back in 2018, the first market to eliminate single-family zoning completely was Minneapolis. Now you can now build duplexes or triplexes in any area that was previously zoned for single-family homes only.
In 2019, Oregon followed suit, and last fall Gov. Newsom in California signed similar bills — SB 8, 9, and 10 — into law which all took effect January 1 of this year.
What has started to become apparent to legislators is that housing affordability is an incredibly significant issue and the only way to get around it is to add to housing supply.
I believe that this will actually have a significant impact in more inexpensive markets where popular belief is that additional density will lower the values of existing homes. I actually see existing homeowners in these markets will find their home values rising at a faster than average pace because of these policies.
6. Climate change will start to seriously impact where buyers choose to live
Now that natural disasters are increasing in frequency and climate risk data is starting to become more readily available, get ready for homebuyers to require more information from their brokers about these risks and their associated costs.
Specifically, buyers will want to know about an area’s flood and fire risks, and if that might impact their insurance costs or even the mortgage rate they will get. You see, there is a practice known as “blue-lining” where banks or mortgage lenders draw lines of risk around certain neighborhoods — or even streets — often without clear disclosure, and this can impact the mortgage rate that buyers are offered.
Although more homebuyers are not worried about climate change than currently are, the tide — excuse the pun — really is changing. This is being led by Millennials, but it’s also high on the list of concerns from Gen-Y buyers and even Gen-Z who, although still far too young to be in the position to buy a home, will be very focused on this when they get to the ripe old age where homeownership becomes important to them.
7. Urban markets bounce back
While increased working from home can and will raise housing demand in areas farther away from city centers, it may not necessarily mean less demand for living in cities. In fact, some urban neighborhoods may even see demand rising as highly desirable city neighborhoods, which were once only convenient to a subset of commuters, become more accessible to a larger set of potential new residents.
At the same time, however, this could be a problem for some distressed urban neighborhoods where proximity to employment centers may have been their best asset.
We may see a more unique shift in select cities that have historically relied on the tech industry to provide significant demand for urban housing. Work from home has led them to lose some of these residents but where tech worker demand may drop, it will likely be replaced by workers employed in the biotech industry. These are people who still have to go into their labs, and most can’t work remotely.
This will be most noticeable in markets such as right here in Seattle, which is the fastest-growing area for life sciences employment in the country. But I also expect to see cities like Atlanta, Miami, Dallas, and even Madison WI benefit from this trend too.
8. A resurgence in foreign investors
Prospective buyers have been sitting on the sidelines since the pandemic began, but they started to look again when the travel ban was lifted last November.
Of course, all this has been put on pause because of the rise of the Omicron variant, but if we don’t close our borders again, I fully expect foreign buyer demand to rise significantly this year.
I would add that foreign buyers were still closing on home purchases even when they were unable to enter the country by buying “sight-unseen” only having viewed the home remotely. This is likely to still be the case even if we end up shutting down the borders again.
9. First-time buyers will be an even bigger factor in 2022
Earlier, I mentioned that I anticipate a demand surge when work from home policies are clearer, and some of this growth in demand will come not from existing homeowners but from first-time buyers who currently rent.
4.8 million millennials will turn 30 this year, and that’s the median age of a first-time buyer in America. An additional 9.4 million will be celebrating their 28th and 29th birthdays this year, and I suggest that these younger buyers are likely to start a search for their first homes earlier than normal if they can buy further out and into markets where it’s more affordable.
10. Forbearance will end, and it’s going to be OK
I talked about this extensively last year with my position being that forbearance was a well-thought-out program to keep people in their homes even if they were not able to make their mortgage payments.
Many thought that this would ultimately lead to a wave of homes being foreclosed on and that would hurt the housing market but that has absolutely not been the case.
In fact, as of recording this video, there are now fewer than 900,000 owners still in the program and that’s down from its May 2020 peak of almost 4.8 million households who were in forbearance.
This number will continue to shrink but, even if some owners simply can’t get back on their feet, I don’t expect to see a significant increase in foreclosure activity as they exit the program. Yes, foreclosures will rise this year but only back toward their long-term average.
There will not be a wave of foreclosures simply because many homeowners who can’t get things straight with their lenders will decide to sell their homes in order to satisfy their obligations and not have their homes repossessed.
This is already happening and we know this by looking at the makeup of homes currently for sale where the number of homes listed for sale that are priced in the bottom 5 percent of their respective markets is jumping. In fact, it was up by 13 percent in the third quarter of last year.
Don’t wait for any sort of wave of cheap, bank-owned homes to come to market because I just don’t see it happening.
With demand for housing remaining so strong, why aren’t more homes being built?
From a demand standpoint, historically low mortgage rates are very tempting for buyers. This is exacerbated by demographically driven demand with roughly 9 million millennials hitting the age when they think about buying their first homes.
As for supply, up until the start of this year, we were actually living in our homes for twice as long as we did in 2000 and this means that homes aren’t turning over as frequently as we are used to.
More demand than supply should have pushed builders to construct as many homes as possible, but they haven’t. The reasons for this are numerous, but it’s essentially all about cost.
Land cost, labor cost, regulatory costs, and let’s not forget building material costs.
Builders have been busy but in the upper end or luxury segment where they can still make some money, but not where demand is most robust, and that’s in the entry-level market.
Will this change? I hope so — but we won’t get back to a “normal” market for quite some time to come.
Matthew Gardner is the Chief Economist for Windermere Real Estate, the second largest regional real estate company in the nation. Matthew specializes in residential market analysis, commercial/industrial market analysis, financial analysis, and land use and regional economics. He is the former Principal of Gardner Economics, and has over 30 years of professional experience both in the U.S. and U.K.