Review of all things Real Estate: 2022 fall housing market predictions

Last week we learned that there is not a housing bubble; there is reduced inventory, more than normal, and that mortgage interest rates will likely reach 7% by the end of the year. In fact, my loan officer locked a buyer at 6.75% yesterday so 7 % certainly doesn’t seem that far away.

Inflation has not reduced in the last week; some indicators are that despite the Funds rate increases, inflation might have actually risen in September (which we’ll know within several weeks when the reports are issued).

This week we will discuss who the buyers were in 2021 (important because we anticipate the next round of buyers will likely remain the same, and this group of buyers have jobs and make good money), what is the current supply and demand, and the warning signs of a market crash in case the “experts” miss the mark in declaring there is no bubble and that there will be no market crash. Read on.

Who bought houses in 2021?

This is a very important point to consider as it may provide clues as to which generations may buy a home, this fall, and beyond. Based on National Association of Realtors data:

Homebuyer generation : % of 2021 buyers / Median age in group

Gen Z: 21 years and younger: 2 / 21

Younger Gen Y/Millennials: 22 to 30 years: 14 / 27

Older Gen Y/Millennials: 31 to 40 years: 23 / 35

Gen X: 41 to 55 years: 24 / 48

Younger Boomers: 56 to 65 years: 18 / 61

Older Boomers: 66 to 74 years: 14 / 69

Silent Generation: 75 to 95 years: 5 / 78

Current supply and demand

Housing demand in our current cycle has been driven largely by demographics; we have the largest cohort in U.S. history of young adults between the ages of 25 and 34; prime age for household formation and home buying, and this group should continue to propel demand for the next two to three years. That being said, supply has failed to keep up with this demand. Even with recent increases, inventory is at about three months which is well below the six month supply that’s considered “normal.”

The increase in inventory levels is likely because many buyers are holding off in the hopes that prices and/ or mortgage rates; and inflation, will drop in the future.

Additionally, some homeowners decide to stay put due to economic concerns, given the struggles to find a new home plus they don’t want to give up their sub 4% low mortgage interest rates by selling and having to buy at +6% mortgage interest rate.

Borrowers are more likely to pay their mortgages

When the housing sector crashed back in 2008, the reasons were multifold: foreclosures, defaults, predatory lending, highly leveraged buyers, irresponsible speculation in the market. Today’s mortgage borrowers are more responsible, there’s higher lending standards, better fiscal discipline and a strong job market means borrowers can make their payments.

Foreclosure activity today is at only about 50% of where it was before the pandemic, and mortgage delinquency rates are lower than usual as well. There is no new foreclosure crisis on the horizon, homeowners have a record amount of equity today; nearly $28 trillion, so a modest decline in home prices won’t affect very many.

Warning signs of a market crash

Experts concur that we are not in a housing bubble; currently, nor is a housing crash on the horizon. Still, it’s good to know the red flags that signal a potential market crash, including:

• Increasing loan to income levels

• Overpriced properties that outpace affordability, inflation and economic fundamentals

• Higher mortgage rates

• Lower economic growth

• Escalating mortgage balances

• Climbing subprime mortgage loan numbers

That being said, considering the list above (inflation, higher mortgage rates, low economic growth) we could be in for rough waters ahead if we slip into a severe recession.

Bottom line

Once buyers adjust to the new reality of interest rates and if inflation is tamed, (in my mind this is questionable with just monetary policy, I believe what we really need is fiscal policy/discipline at the national level), we will see some market activity; albeit a less active market than we have had for the last several years.

The fourth and first quarters are always quieter than the second and third quarters and with consumers tightening their belts anticipating uncertain economic news, I would doubt there will be a measurable amount of buying and selling real estate activity. As always though, properly priced properties do sell, so if you are going to list your home, it’s best to consult with a local area real estate professional for advice about the market and what is proper pricing for our area and our market conditions.