The COVID-19 pandemic impact on the housing market is like nothing the U.S. has seen before.
The pandemic created the current housing shortage with a huge number of millennials (mostly in their 30s) as well as other demographics who are competing with each other to become homeowners and builders who are no longer able to ramp up due to the multiple increases in the price of construction materials. The result, competition and bidding wars on almost every single home that hits the market even in the fall and the winter seasons where the number of transactions usually diminishes significantly.
To date, most experts agree that the California housing market should remain solid if the pandemic is kept under control which means that the housing market will continue to favor sellers for some time as strong homebuyer demand and inventory shortages will continue for a while with home prices projected to increase in 2022 but at a slower pace than in 2021.
To understand how and why the real estate market may evolve as described above it is crucial to comprehend the role played by inflation and interest rates in the present real estate market.
Over the past 2 years, the US Government supported American households and provided financial assistance, which gave many people more purchasing power. Also, many Americans were able to work remotely and didn’t need to spend much on commuting, dry cleaning, and other expenses. As a result, companies on the supply side of those goods and services needed to charge more since they had fewer customers. Manufacturing was similarly disrupted by the pandemic as illness and lockdowns slowed business, movements of goods, and trucking those items to American customers. Lastly, worker shortage in some areas of the economy caused companies to consequently raise prices of consumer goods.
According to Lawrence J. White from NYU, Inflation exacerbates the housing demand-supply imbalance, which means even higher prices for housing. People think, ‘I need a hedge against inflation, housing has traditionally been a long-lived, durable asset.’”
The past 2 years also saw the lowest mortgage rates in the history of real estate. As you may remember, rates dropped steadily in 2020 after the Federal Reserve lowered the federal funds rate in response to the COVID-19 pandemic. On the bright side, low rates helped many buyers to become homeowners but on the flip side, it contributed to fueling the explosion in home prices. In other words, homes might cost more but people would still be able to buy them as monthly mortgage payments stayed about the same. Since the last quarter of 2021, mortgage rates have already increased in response to the Federal Reserve’s hawkish stance on inflation and it is expected that federal funds interest rate will be up a few times in 2022.
Predictions from prominent figures across the real estate industry estimate that the 30-year fixed-rate mortgages may increase to 3.5 - 4% by the end of 2022. If rates go up, this might help keep prices in check and reduce competition, which after a while could drive price down.
In 2022, it is also expected that lenders will shift their attention toward the purchase market (vs refinance) and will resume offering low-down-payment loan options and provide flexibility to underwriting standards. This could make it easier for many borrowers to qualify for a loan, including people who are self-employed or work in the gig economy. This will represent a major turnaround from the start of the pandemic when lenders made it harder to get a mortgage.
I hope that the above synopsis will help you better understand the current state of the real estate market. Should you have any questions, feel free to contact me.
Sources: keepingcurrentmatters.com; car.org; housingwire.com; realtor.com; cutimes.com; insigniamortgage.com; mark