The end of 2021 is upon us, and a lot has changed over the last 12 months. This year was a transitional year as the world became accustomed to COVID-19, vaccines became widely distributed, and people went back to work. For our industry it was a very good year, but a few developments meant the anticipated broad-scale economic recovery was not as complete as expected.
COVID is still causing a lot of problems, including supply chain issues. The Omicron variant has exploded in recent weeks, and some businesses have again shut down. No one knows just how bad it will get or whether this variant will quickly run its course. These supply chain issues, coupled with huge consumer demand stemming from low interest rates and large government stimulus, have led to rising prices.
Despite the challenges, in 2022 I believe the economy will continue to improve as we get better at dealing with COVID and the disruptions associated with it.
I do think a few of the 2021 trends that affected our industry will persist into 2022. Supply chain shortages wreaked havoc on a variety of industries, including the home builders. Elevated lumber prices were all the talk through the middle of 2021, and while those prices have come down somewhat there is still a shortage of many building materials and the labor needed to build. These shortages will hopefully ease in 2022. However, because of Omicron and big demand for these supplies, I don’t see that happening until the later part of the year. What this means for builders is that margins will likely get squeezed as costs stay elevated and buyers become more price sensitive. For buyers it means that new home prices are unlikely to come down anytime soon.
On the sales side, I think interest rates will remain low enough to support high purchase volume. While demand for homes has somewhat cooled, there is still plenty of it to go around. Many people who want to buy have been unable to do so during the last 2 years because of a limited supply of homes for sale. A lot of these people have been discouraged by bidding wars and ever escalating prices.
I think that as home prices begin to stabilize, people who have been sidelined will probably reenter the market. Also, changing work patterns (e.g., forever work from home, or limited in-office time) have meant many people need to reevaluate how their home is used and whether it is adequate for the new landscape. This trend is still intact, and I think will continue to push people into larger homes in the suburbs and smaller markets. Based on these two market drivers, I think overall sales in 2022 will continue to be strong.
The biggest surprise of 2021 was the inflation explosion. Inflation ran at approximately 6.8% in 2021, higher than at any time in the last 40 years. Price increases were a result of tight supply chains and larger than expected demand from consumers. Throughout most of 2021 the Fed said that they expected inflation to be “transitory” and to abate quickly. However, as the year closed out the Fed acknowledged that inflation may not go away so easily.
In September and December, the Fed signaled changes to its pandemic era policies; specifically, a winding down of bond purchases, which includes mortgage-backed securities, and an expectation of rate hikes in 2022. These changes will impact the entire real estate industry, but the effects will be strongest for those participants that rely heavily on refinance volume. Even a small move up in rates will mean big drops in refinance applications. Lenders will need to offset the loss of this business, or else they may be forced to consider staff cuts.
I think the Fed is aware of how disruptive higher rates will be, so I think they will be cautious and, if inflation doesn’t worsen, make changes in a slow and steady manner. I expect 30-year mortgage rates to average around 3.75% next year, which should allow for a gradual drop off in refinance volume while still supporting a robust purchase market.
Overall, I think 2022 will be another good year for the real estate industry. Some parts of the market will feel the effects of rising rates more than others, but overall volumes should remain strong. The biggest risk to our industry, and the economy as a whole, is sustained higher inflation that forces the Fed to aggressively raise rates. I think this will be the story to watch in 2022. Even if inflation abates, rates will almost certainly move higher.
Lenders should focus their efforts on building relationships with builders and agents so that they can better weather rising rates. They should also consider expanding home equity financing options. Builders should work on controlling costs to keep prices affordable as financing costs rise. And agents should try to focus on building relationships with those people who have fled the market during the last couple of years or those people whose work life has adjusted during COVID.
As for buyers and sellers, I think this year will still be a seller’s market but maybe not as thoroughly so as during the last two years. 2022 will hopefully be the year the world moves beyond COVID disruptions, and that will mean changes for everyone, including those in the real estate industry.
Chuck Biskobing, senior attorney at Cook & James, devours information and distills research from his work as a closing attorney and personal interactions with builders, agents, loan officers and other industry insiders. He’s licensed in Georgia, South Carolina, North Carolina and Connecticut and has participated in more than 5,000 real estate closings. To counter all the geeky screen time and paperwork required to stay current on the real estate climate, laws, news and industry trends, Chuck is an avid outdoor adventurist who has hiked Mt. Kilimanjaro, scuba dived in Zanzibar and once took a five-month hiatus to hike the entire 2,189 miles of the Appalachian Trail.