The stage is being set for another strong year for the local real estate industry. But it won’t be a year without bumps in the road.
A report from the TCI Group report shows a weak, unbalanced existing home for sale inventory. Before approaching balanced market conditions, you have to get into the luxury price ranges. The benchmark is five to six months of inventory.
Most of the expert market outlooks are for moderation from the past year-and-a-half’s craziness. There are already fewer multiple offers and more sellers are backing off their listing price. Here’s what moderation will likely look like in the local market.
– There will be more new homes hitting the market at and during the 2022 prime buying and selling season. There are ongoing single-family projects in all of the region’s major cities.
– Improvements in the existing home inventory are expected from less demand due to higher mortgage rates and affordability issues. Double-digit home price increases have shifted some of the market momentum to renting rather than buying.
While inventory is a core basis, the big question centers on prices. It’s likely that the double-digit price growth has run its course. A number of factors will exert downward pressure on prices. They include:
– Mortgage rates are expected to increase and push monthly mortgage payments higher.
– Lenders continue to toughen requirements.
– Manufactured homes will likely continue to claim a bigger market share due to their affordability advantage.
– The surge of pandemic refugees has slowed. People are still moving, but they’re staying closer to home instead of headed off cross-country.
The local housing market boom that began in mid-2015 was slowly moving prices higher. The pandemic pushed it into overdrive. Home prices appreciated at or just below 3% before the pandemic, and there was a sustainable wage-home price balance. During the pandemic, the balance turned upside down. It ratcheted up demand to levels not seen in two decades. The price growth rate moved into the double-digit range when coupled with the tightening inventory.
Not long ago, the local benchmark for existing home sales was in the $200,000 and below range. They accounted for over 75% of all existing home sales. During the 12 months ending in mid-December, that market share dropped to 49%. Homes in the $200,000 to $300,000 price range accounted for 29% of all sales.
But that wasn’t the largest growth rate change. Growth rates for luxury homes were in the triple digits. And the $1 million-plus class home saw an even more dramatic growth rate.
While there is consensus in the real estate industry that price growth will decelerate – the current growth rate is simply unsustainable in the long term – there is no consensus about what the rate of home price growth will look like in the new year.
The forecasts cited earlier in the report are conservative examples. All forecasts have to assume a base case. Currently, that case is that the economy will grow at a slower rate, the supply chain will not be back to normal until late next year at the earliest, and that mortgage rate increases will be gradual. Although the current best-rate-available is in the 3% range, only borrowers with the best credit and big down payments can take advantage of them. A higher mortgage rate means a bigger monthly mortgage payment. And there’s the ever-present pandemic and inflation that is beginning to look like the relative who showed up unannounced and threatening to stay too long.