2022 Real Estate Market Update
It’s the middle of spring 2022, and 3 months since my original housing market update. Let’s do a DC Housing Market Update.
There’s no inventory! House prices keep going up! Even if rates go up prices won’t go down! And even if they go down, you’ll still be paying more per month! (Covered this in Real Estate Lies where an agent was advertising based on BS numbers that you will still pay more if the scenario presents itself when rates go up if prices go down.)
What else is going on in the world?
- Gas prices
- Supply chain issues
- Help wanted signs – no labor
- Ukraine Invasion / war
- Car prices
- Interest rates rising
Sounds like a party!
A great man (Warren Buffet) said “be greedy when others are fearful and fearful when others are greedy.” What does this mean? It means what so many other quotes like this mean – Don’t follow the crowd, forge your own path. I’m a big fan of doing the opposite of what everyone else is doing. An old co-worker from my first days in land development said “You know what you are? You’re a contrarian.”
It’s true. I don’t like bandwagons for anything and I don’t jump on them. I like to look critically at the facts to determine what’s really driving certain movements and trends and then pick it apart. Why? Because this is not only where money is made, but it’s where you find the truth. Sometimes there’s such a sway by the media or groupthink to present something as one way, and you have to dig in and think for yourself.
Prior to this week I would say I was in low level alert that things could not keep going the way they were where you have people offering everything including their first born to the seller for the privilege of buying their house.
Right now I’m on medium alert. Rates went up. They were predicted to hit mid 4’s by the end of 2022 and look, they got to 5% in March. I want to find every single person who has said that rates going up won’t do a damn thing and punch them in the throat. Yes, it will do something and it has done something. It changed affordability. Most of us live in a monthly-budget frame of mind. A certain amount of money comes in each month and we have a certain amount of bills that have to be paid from said money, wash, rinse, repeat. Unless you have a money tree in your backyard, this is how you operate as well.
Interest rates hitting 5% has impacted every single client I am current working with. They have all dialed back their cap. Buyers cannot change their affordability so they change their expectations. Everyone is in the mode of compromise now, downgrading items from their “must haves” to the “nice to have” list.
Do you think my clients are getting desperate? Hells no, not on my watch. There is nothing to be desperate about, we’re going to take deep breaths and make good decisions.
Everyone loves to defer to 2008 and talk about how the mortgage market was entirely fraudulent, with no-doc loans and drive-by appraisals. It was the makings of disaster and it imploded as we all know. They say, “See, that won’t happen now.” Well, can it?
So what’s happened since then? What’s the same and what’s not?
Or as I like to say, where we didn’t learn our lesson.
- Government still infusing money into the economy with low interest rates, buying bonds. More money chasing same goods and services results in inflation.
- Mortgage rates artificially low.
- Overpaying, bidding up pricing up 20% year over year.
- People have FOMO
- Better quality mortgages.
- Increased investor activity
- Incremental improvement is due to non-primary, 2nd homes, investors. Institutional capital – fix and flip or rent.
- So many more categories of buyer in the market right now.
What happens? In lower-priced markets, people on the fence jump into the market thinking it’s their last chance. In higher priced markets, people on the fence jump out of the market. Wherever you are, this lasts for a few months if rates continue to rise. Then we confront a new market. These last few years have been like little micro markets, which change and increase in intensity or shift.
One of the premier housing analysts, Ivy Zelman, has been hitting the interview circuit in Quarter 1 of 2022. She’s promoting a book. But she’s fabulous. Here are the headlines from those interviews:
- “Analyst Who Predicted ’07 Crash Sees ‘Yellow Flags.’”
- “Now is the Time to Buy!”
- “Housing Market: Time to be Cautious Given Current Prices.”
- “We Think Housing is Set to Moderate.”
- “Real Estate Pro Sees the Housing Market Staying Strong After a Hot 2021.”
- “Housing Market Could See a Pretty Substantial Slowing.”
- “Here’s Why this Housing Market Expert Says the Market is ‘Euphoric’ and Urges Caution”
Did you just get whiplash? I did. This is the same woman doing the same interview and those are 7 different headlines from it.
A word on Wall Street housing market analysts – they can’t slam an industry. But you have to listen to what they are saying, and you have to not be a moron when you’re interpreting it. Ivy Zelman has her own company now, which gives her more leeway than if she were still with a Wall Street Firm.
Here are some key facts of things she said during an interview with Bigger Pockets Podcast.
70% of homeowners are locked in at 4% or lower right now, 30 year fixed.
In 2018, only 39% of homeowners were locked in at 4% or lower.
There is a disincentive for people to sell with these rates locked in.
New construction is booming, and the number of units in backlog has surged to 2007 highs. These homes are not in all areas of the country, they are where the growth is. Southeast, Southwest, Texas. Population and household growth is slowing. Her stance is that the demographics are sobering. There won’t be enough people to fill these houses.
She also noted that there hasn’t been the same foreclosure and eviction processes in place, keeping physical occupancy high. Once these houses in the pipeline hit the market everything will shift.
Cites Phoenix as a place where tons of money is pouring in, and they are building homes in areas so far out where even the cows don’t want to live. If the supply chain issues were fixed, then people would get into these houses. And prices could correct 5-10%.
She says it will take the rest of 2022 for the builder pipeline to hit the market and level things off.
I don’t track the rental market as much since it’s not an area in which I operate, but, it’s important to know what is happening with the rental market since there is a portion of the rental pool who would become buyers.
Rents are rising at exorbitant increases year over year. Everyone I have who is looking to buy is getting slammed with huge rental increases which is helping to fuel their motivation to buy now. But for the renters who can’t buy, what do they do? They combine households. Then there’s less demand for rentals, supply goes up, pipeline of rentals hit and they start offering discounts, incentives, etc. So then rents go down. At the same time, if interest rates are going up, people start to look at rentals again. With homeownership rates at 65%, 1/3 of us aren’t buyers.
Ok so where are we?
I believe the real estate market status is largely determined by a combination of economic facts, true demand, emotion and what someone believes will happen.
My gut says that the cost of capital, i.e. interest rates, will continue to go up because we have an inflation problem right now that is mind-numbing. Groceries, gas, household goods, cars – the prices are insane. The average buyer won’t be able to compete with interest rates going up, prices of everything else going up, and the institutional investors in some markets that are just throwing money at houses. There will be people who bow out of the market to buy.
What is going to happen in DC? We won’t benefit from that builder-pipeline Ivy Zelman mentioned. Our land is already totally developed here. But, buyers are feeling the pressure. No one I’m working with has bowed out, but, agents I work with are reporting that they have clients who are on offer 10 or 12 and are just wiped out and planning to rent.
We already have a high cost of living here, it’s not going to take much more to push people into making-do wherever they are living now, or, cashing in their company’s “work from home forever” option and moving out of the area.