When’s this real estate market freight train going to slow down? When is the madness going to stop? The multiple offers? The people lining up to see a home? Is there a bubble that’s going to burst?
Well, if you’re asking these questions and wondering what’s going to happen in 2022, I’m here to help you answer them. I want to bring some sanity and some clarity. And, at the end, I’m going to give you my predictions on exactly what’s going to happen this year and what things to keep an eye out for to make sure that you don’t get caught by surprise if the market does turn.
So, how did we get here?
You probably already know that the real estate market’s crazy right now, and that’s no surprise. We had ~25% appreciation on the west coast last year, depending on the city. So, how is this happening and what’s going to happen next?
How is this happening with real estate prices?
There’s a shortage in the supply of homes right now. The current inventory of homes for sale in the US is about 1.5 million. For comparison, the peak in homes available for sale was 3.9 million in the summer of 2007. That’s a massive difference. Since then, however, the United States population has grown by 31 million and, at the same time, new home construction has been slowed by material and labor shortages and is struggling to keep up with population growth. In short, we’ve got more people with less houses to buy.
So, it’s really a supply problem right now. It’s not a demand problem. There’s plenty of demand right now. Demand is pretty normal right now. We just have an insanely low number of homes to fulfill that demand. That’s a hard problem to solve.
What happens when there’s a supply problem in real estate?
Now, what happens when you have a supply and demand issue like this — where you don’t have enough homes to match the people who want to buy. Well, you’re going to see prices go up. Check out this graphic on the market (I walk through the whole chart more in depth in the video above).
This is the Cromford Market Index. It’s a predictor of future annual appreciation. It’s a measure of how hot the market is. If it’s a hundred, that’s a normal market. Over a hundred is a hot market. Below, that’s a slow market. The first little peak on the left is around 2005. At the far right, there’s the dip (that was in 2020) and now it’s going on up again. Right now, it’s a hotter market than in 2005. Home appreciation is rampant and prices are going up.
What’s going to cause real estate prices to go down?
I’m going to make this as simple as possible. Either you need more houses or you need less demand. It all boils down to that. So, we’re going to look at affordability and supply.
Affordability in Real Estate
To one end, what will cause demand to go down is if homes become less affordable. If people can’t afford a house then demand decreases. But right now, even though the market is really crazy right now, homes are still affordable. For things to get as unaffordable as they were in 2006, mortgage rates would have to double. Now, interest rates are not going to double tomorrow. Home prices are not about to suddenly go up 30% tomorrow and, right now, incomes are also on the rise.
Supply in Real Estate
Supply is another way to swing the market. Homes have to be built, but building houses takes time. This is not an overnight fix. And while homes are being built more people are being born and incomes are going up. Now, homeowners could sell, and supply would increase that way. However, with prices going up there’s not much incentive to sell right now. And unless they’re investment properties, when someone sells, they have to move somewhere, so that doesn’t help increase the supply of available homes.
Now if investors sold a lot of investment properties, that could help sure up supply, but since rents are going up many probably aren’t selling right now. There’s not much incentive to do so. Rents are going up along with prices right now. This is how a normal market functions and it’s yet another sign that we are not in a bubble.
What do I think about the current real estate market?
I don’t think interest rates are going to double. I think the Fed will do what they have to do to keep interest rates under control. But I do see prices increasing. I think we’re going to see another 25% increase this year. As I said earlier, we need prices to get about 30% higher for affordability to start being a problem, and, unfortunately, that’s probably going to happen eventually. My best guess is that in maybe a year and a half or two years we’re going to see that Cromford Index get well past 100 to 150, or 200, where it’s more of a normalized market. But, in short, I don’t think it’s going to slow down anytime soon.
So, what does that mean to you?
Well, it means if you’ve been waiting to buy and you keep waiting, you may find yourself priced out of the market. If you want to get in the game, now’s a solid time to do so. Rates are going up. If you own houses right now, I would hang on to them. I think it’s a fantastic time right now to own a home.