Is The Housing Market About To Crash? 

Reprinted from allenbrake.com

Key Points
  • The year that just ended was a historically unprecedented seller’s market in the St. Louis region. 
  • Many of the same market conditions exist in 2022. 
  • Rising interest rates make this a key time for potential buyers to take action. 

Remember the Cabbage Patch Kid craze of 1983? If not, it’s definitely worth a YouTube search. Otherwise dignified suburban moms – though more than a few dads joined the fun before it was all over – started throwing punches and, in some cases, had to be beaten back by baseball-bat wielding toy store employees while in reckless pursuit of dimpled dolls. And it all happened because of one word. 

Scarcity. 

Cabbage Patch Kid demand far, far, far outpaced Cabbage Patch Kid supply, and that made seemingly rational people act totally insane. 

Fast-forward to our time. Gone are the exceedingly large hair styles of the 1980s. Still here is the fact that scarcity causes crazy things to happen. Take, for example, the housing market in 2021. A combination of factors created an environment in which homes for sale were the Cabbage Patch Kids and Realtors were the toy store employees, weeding through offers from a horde of would-be buyers in pursuit of the exact right one that would bring the most money to their clients. 

The Allen Brake Team took a look back at the 2021 housing market to analyze what exactly happened to create such a craze and then looked forward to predict whether those same conditions will continue to exist throughout 2022. The conclusion? Well, buckle up. It’s going to be a wild ride. 

What Happened

To sum it up and sound more than a bit cliche, what happened was the perfect storm. 

  • A pandemic-induced recession in 2020 created historically low mortgage rates that made buying a home suddenly affordable for many people who otherwise still would have been saving up for down payments. 
  • The sudden boom of remote work allowed people to explore living further away from the office, adding more would-be buyers to the market.
  • Demographically speaking, a wave of millennials came of age and, spurred on by those low mortgage rates and remote work options, joined the home buying hordes in massive numbers. 

Cue the housing version of the Cabbage Patch Kid craze. 

The result was a market skewed dramatically in favor of sellers, who had to do little more than whisper that they maybe were perhaps considering selling their home to see a line of would-be buyers form outside their front door like you might have only previously seen for the hot new Disney World ride. 

Demand far outpaced supply, and the result was predictable: Massive price growth. In fact, whereas pre-pandemic home price increases hovered around 5% year-over-year, August 2020 through August 2021 price growth accelerated to nearly 20%. 

Those would-be home buyers attracted by historically low mortgage rates in the low- to mid-2% range for people with even an average credit score suddenly had to put in offers well above list price to even sniff the home they wanted – and many still tasted failure time and again when the prized Cabbage Patch Doll went to someone else’s mom. 

Oh, and sellers? They saw a huge return on housing purchases made as recently as 2019. Some took the profit from selling and used it to upgrade into a bigger home or better neighborhood. Others downsized and moved on to a new stage of life. Almost all wore large smiles at the closing table. 

What’s Going to Happen

Fast-forward to January 2022. The phrase we at The Allen Brake Team keep hearing is, “This can’t last forever.” That’s most likely true. Double-digit home price increases aren’t going to last in the long term. 

But they likely will continue for some of 2022. 

We say that with some confidence because, having looked at all the models from reputable groups trying to predict the housing market this year, we don’t see a whole lot of consensus. The major players in prognostication see anywhere between 7% and 16% price growth. That’s an extremely large spread, considering everyone’s looking at the same data. 

On one side, you’ve got Goldman Sachs and Zillow, both of which predicted double-digit increases for 2022. We tend to deemphasize Zillow and think you should too. After all, their bet on the real estate market in 2021 was a massive failure that led to a quarter of its workforce losing their jobs. But Goldman Sachs sees a 16% jump from Oct. 2021 to the end of this year, and their analysis makes some sense. 

On the other side, you have RedFin and CoreLogic, both of which see 12-month price growth dropping below the historical average of around 4.6%. CoreLogic, in fact, sees just a 1.9% jump. That would be an astounding slowdown and, frankly, it’s not one we see supported by the data. 

The reality, especially in St. Louis, is that scarcity remains a big problem in the market and will do so for the foreseeable future. At the end of 2021, there was less than a half-month of inventory of available homes. That means that if no more homes went on the market after today, there would be no available homes to buy after roughly 15 days. Consider, then, that what’s considered a neutral market – one in which supply and demand are balanced – features roughly six months of inventory. 

To use the Cabbage Patch Kid analogy, suburban moms wouldn’t have gone nuts in toy stores if they had a reasonable expectation of getting their hands on a doll at some point in the next six months, but those suburban moms knew they needed to learn some mixed martial arts skills if they were going to make Little Janey happy on Christmas morning. 

We see supply growing in 2022 related to demand (more on that in a moment), but not enough to take away the scarcity problem. The nation’s demographics – and the St. Louis region’s demographics – don’t support a sudden flip-flop. The influx of first-time home buyers created by those coming-of-age millennials isn’t going to let up anytime soon. The years 1989 to 1993 were the five biggest years for millennials to be born, which makes 2019 through 2023 the timeframe in which they’re entering the market. 

But wait! What’s that on the horizon? 

What makes The Allen Brake Team peg year-over-year price growth expectation in the high single-digits for 2022 instead of the huge jumps forecasted by Goldman Sachs is interest rates. The Fed, suddenly aware of an overheating economy that’s causing everything from bacon to BMWs to be ridiculously more expensive, indicated at its December meeting it would be raising interest rates two or three times in 2022. 

That means the era of low- to mid-2% mortgage rates is going away. In fact, its already gone. We’re seeing interest rates for those with average credit seeking a 30-year mortgage in the low- to mid-3% range already, and there’s nothing that indicates to us that the increases won’t continue. Just how high interest rates will go by the end of 2022 is a matter for debate. We wouldn’t be surprised if the average loan-seeker is confronted with 4% rates. 

So what does that mean? Rising interest rates are perhaps the only tangible force pushing back on home prices, and it’s a substantial shove. It’s also the reason that, whatever is going to happen with home prices in 2022, now is the best time to buy if you’re thinking about doing so this year or next. Here’s why: 

Banks don’t like to lend money they don’t feel will be paid back. For every 1% interest rates go up, a buyer loses 10% of her purchasing power. We’ve already seen roughly 1% increase from 2021’s lows. That means the $200,000 loan you hypothetically could have gotten then is gone, and the bank is willing to lend you only $180,000. That’s a significant difference that will push some potential home buyers to the sidelines. 

Think of it another way: If you wanted to borrow $500,000 for a mortgage, at 3.1%, where rates were when January started, you’d have a $2,135 monthly payment. That same loan at 3.6%, which we’re approaching, would be $2,273 a month. Even if a bank is still willing to make that loan, it’s an additional $50,000 you’ll pay back over the next 30 years. 

What happens when rates rise and some buyers are pushed out of the market? Well, fewer buyers in the game means less demand. Less demand means that sellers won’t have all the power, as they did in 2021. We’re already seeing far fewer situations in which multiple offers – more than 50 in some cases for one house in 2021! – drive the price far, far above where a home went on the market. Sellers will still get quality offers for good homes in desirable neighborhoods. Our job as professionals is to help them set realistic expectations in the market of 2022, not 2021. 

The Unknowns 

All of this is written with a few asterisks. First, there’s this whole pandemic thing. The more companies are able to call their workers back to the office, the less of a spread we’re going to see from those fleeing more urban areas for distant suburbs. That would put more downward pressure on home prices in some areas The Allen Brake Team serves, and year-over-year price increases might be closer to the 4.6% historical average. 

Second, there’s the Mortgage Bankers Association Scenario, and it’s one worth paying attention to. It’s the one in which interest rates don’t just reach 3.something%. The industry trade group forecast calls for rates hitting 4% by the end of this year. That would be an additional $90,000 over the course of a traditional 30-year mortgage in the previous example of a $500,000 loan. And no matter how you slice it, that’s a lot of money. 

Conclusion: Is the Market Going to Crash? 

In a word, no*, with the * meaning “Not unless something unforeseen happens.” 

That means that if you’re a homeowner in a desirable area and have owned your home for more than five to 10 years, you’re likely putting your feet up and kicking back inside an investment that is worth more – and perhaps a lot more – than it was when you bought it. It might be worth considering a strategy to sell and use that money to either upgrade to a bigger house or better neighborhood or get a jump on downsizing to ease into a new stage of life. 

For potential buyers, it means that while sellers still hold a lot of power in the current market, you are in a better position than you were at this time last year and, because of rising interest rates, you are in a better position than you likely will be if you waited until the end of the year. It might not make obvious sense to buy in a market that has seen such rapid price increases of late, but it does make sense if you don’t think prices are going to actually decrease anytime soon. No one with any sort of credibility is actually forecasting a price decrease in 2022 or 2023. 

So what do you want to do? Do you want to sell? Buy? What’s your short-term and long-term plan? Whatever it might be, The Allen Brake Team is Here and can help you formulate your plans and execute them calmly and confidently in 2022. 

The Allen Brake Team
(314) 375-3030
allenbrake.com
info@allenbrake.com

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