By Evelyn Long, Inovated.com
How Home Inventories Might Change in 2022
Shopping for or selling a home can be tricky in this market, and one of the reasons is the low inventory. While the market isn’t as hot now it was in the spring and summer of 2021, we can learn a lot by reviewing the factors that contribute to a competitive seller’s market.
Low inventory naturally increases competition for homes. In April 2022, the number of active listings was down 22% for the year. So why do we have so few homes compared to interested buyers? Here are a few causes for this issue and what you can expect in the future.
1. The 2008 Housing Crash
The housing crash slowed down home building rates, decreasing overall supply. It started with the growth of subprime mortgages in 1999 when the Federal National Mortgage Association created loans available to borrowers with low credit scores.
They could take out adjustable-rate mortgages that started with low monthly payments. These aimed to make loans more affordable to those with lower savings. However, the payments on adjustable-rate mortgages would increase after a few years, increasing the risk of defaults. At the same time, financial firms were pooling these subprime loans and selling them to investors as mortgage-backed securities.
We’re all familiar with the resulting fallout, which shook the financial industry, resulted in unprecedented foreclosures, and sent the entire economy into a recession. Buyers were poorly positioned to afford homes, sellers were often stuck with unaffordable payments, and the previous housing construction boom slowed to a crawl — a crawl now impacting our supply of homes.
2. Millennials Starting to Buy Homes
Millennials were born between 1982-2000, and their ages range from 22-40 in 2022. This is an ideal age to buy a new home, so there is more overall competition, leading to houses being sold quickly. Plus, the millennial generation is the largest population group, far overshadowing Generation X — that’s a lot of new buyers to age into homeownership.
On top of the general size of the age group, pandemic-related trends also contribute to housing demand. Some millennials may have moved back in with their parents during the time or even earlier, saving rent payments and enabling a major home purchase.
Additionally, other coinciding trends include remote workers moving to more affordable housing markets, families privileging space in their home search and low mortgage rates. With all these factors taken into account, it’s not surprising that our limited supply of homes became even more valuable in the past year.
3. Supply Chain Issues in 2020-2021
COVID-19 caused supply chain issues in 2020. Construction workers could not maintain the same on-site schedules with the risk of illness, and the transfer of construction materials was delayed, slowing down many building projects. Even after vaccinations and economic reopening helped alleviate project scheduling, supply chain concerns persisted throughout 2021.
Another issue is that some companies find it harder to rehire workers quickly. Construction needs more than half a million more employees to meet demand in 2022. Without enough labor to meet demand for home construction, companies will struggle to amp up production and alleviate a tight housing supply.
4. Lower Interest Rates
The average 30-year fixed mortgage rate dropped to 3.71% in 2022, making the housing market more competitive. In addition, there was a trend of remote workers moving from high cost-of-living cities to more affordable areas, looking to purchase a house when some of the appeal of city living wore down in the worst of the pandemic.
Economic suffering did result from the pandemic, but many workers were positioned to maintain their income and move to affordable areas — low interest rates helped more people secure mortgages and start increasing home buying rates as the economy began recovery in 2021.
How Things Might Change
Despite the lower housing supply, some changes in 2022 may help balance the market. Here are a few things you can expect.
1. Rising Interest Rates
Higher interest rates can increase affordability but lead to a competitive market. There are also more bidding wars and houses flying off the market. This pace makes the demand outweigh the current supply.
However, the Federal Reserve raised its benchmark interest rate by half a percent. Also, the Fed has been buying bonds to keep interest rates low. These changes decrease availability for certain income levels and reduce the overall demand.
2. The Increase in Projects
Housing construction projects can pick up again as people return to work and materials shortages begin to correct themselves, increasing the overall housing supply.
Additionally, construction is in many ways becoming more efficient despite labor and materials issues in the past two years. Technological advances in project management systems, safety improvements from “smart” PPE and other innovations make construction a more efficient field.
Given the demand for housing, sustainable and efficient methods are also growing in popularity. Modular housing construction reduces building timelines by standardizing building on-site before finishing homes on their final lot. It also tends to be more affordable, letting more homeowners access new manufactured housing.
Altogether, housing construction is expected to bounce back this year. While it depends greatly on local zoning and building regulations, our home inventory may start to tick back up to balance demand.
3. Boosted Housing Prices
Housing prices are rising due to inflation — they grew about 18.84% in 2021. This may help reduce demand and slow down the growth of home purchases.
The rise in home values means many homeowners are in better financial positions that they might ever have expected, while renters are seeing increasing rents due to fierce competition and higher cost of living. These financial changes are likely to keep the housing market cooler in 2022 than it was in 2021.
4. More Room for Negotiation
More housing post-pandemic means sellers have less room to be rigid. Previously, they would make higher price requests or demands. Increasing listings can influence them to reduce costs to meet the growing demand.
Higher mortgage rates also encourage them to stay within a reasonable asking price. In addition, some sellers might make last-minute demands, such as repairs. Some buyers might just walk away. This drops the number of property sales, slowing down the pace of the market.
The Changing Home Market
A myriad of factors contributed to the hot housing market buyers and sellers experienced over the past year. The pandemic and increase in millennial buyers have led to a housing shortage. The effects of the 2008 housing crash are also still felt, as home inventory remains limited from the burst housing bubble.
However, the market is slowly starting to balance out with the rise in mortgages and drop in sales. 2022 is expected to chill out, and buyers are likely to face relatively less competition if they’re dedicated to a new home purchase in the year ahead — though no prediction is ever a certainty.
Author:
Evelyn Long is the editor-in-chief of Renovated, an online resource for the real estate market. Her freelance writing has been published by the National Association of REALTORS®, Insights for Professionals and other prominent industry magazines.
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