2022 Market Outlook

The median existing-home price in November 2021 was $353,900, up 13.9% from November 2020 ($310,800), according to The National Association of REALTORS , representing 117 straight months of year-over-year price increases - the longest run of housing price increases on record. Are we in a housing bubble that’s going to burst? To answer that question, we need to compare what’s happening now with the greatest housing crash in history.

Before the Tax Relief Act of 1997, it was harder to buy and sell a home because any capital gains had to be reinvested in a home or they were taxed. But the 1997 Act made it possible for a homebuyer to purchase a home, occupy it for as little as two years (out of five years of ownership as the principal residence,) then sell it – excluding up to $500,000 in capital gains for married couples and $250,000 for singles.

Instead of staying in a home until the 30-year mortgage is paid off, homebuyers could use the lower homestead mortgage rate to purchase a home, refinance their homes, buy other homes or make other investments. In a push to make homeownership more available to first-time homebuyers and buyers with lower incomes or damaged credit, easy-entry mortgage products including little to no money required for down payments became widely available in the early to mid-2000s. Housing boomed.

But with incentives to loan out mortgage money and little oversight, banks started giving out loans to borrowers who couldn’t pay the loans back. Instead of foreclosing, the banks packaged these bad and fraudulent loans into mortgage-backed securities which were supposed to be AAA good and sold them to Fannie Mae and Freddie Mac, government-sponsored entities that infuse liquidity into the housing market by buying mortgage loans that have been packaged into securities. When the securities were revealed to contain bad loans, the securities lost value. Banks were no longer able to get money to lend to new borrowers and were forced to keep the bad loans on their own books. Mortgage money dried up and housing prices crashed more than 25% by the time it was over.

Between 2008 and 2011, housing hit its nadir, but slowly sales and prices began to improve as investors gobbled up affordable and foreclosed homes to use as rentals.  Fannie Mae and Freddie Mac were overhauled and lending standards tightened to levels not seen in decades. And they’re still tight today.  

What was unusual about the biggest housing crash in modern history is that housing brought down the economy. Usually, it’s the other way around.  The Federal Reserve lowered overnight borrowing rates to banks in an effort to stimulate borrowing. They remained at near-record lows for years to come.

But the recovery had other hurdles to overcome. Between 2007 and 2009, the Great Recession cost Americans precious jobs. Unemployment shot from 5% to 10%, leaving over 15 million people without jobs. Among the hardest hit was the construction industry. Homebuilders were unable to get loans and were forced to let skilled and unskilled laborers go. Wages stagnated, remaining flat between 2002 and 2014, part of the “jobless” recovery.

Even with low interest rates, homebuyers were afraid to take the plunge, until it became obvious that low housing prices coupled with low interest rates represented the opportunity of a lifetime. The government bailed out the banks and other businesses and first-time homebuyers were given incentives to buy homes. Solid borrowers, alongside overseas cash-rich investors, had their pick of homes to buy. And through 2019, the U.S. enjoyed the longest period of economic recovery in its history.

Then COVID-19 hit, and the nation was faced with twice the number of job losses in 2020 as experienced in the Great Recession according to the Bureau of Labor Statistics. While most of those jobs have returned, many remain unfilled and workers are demanding higher wages. One reason is that housing, both rentals and homeownership, has become so costly.

Fast forward to 2022 and many are wondering if strong housing sales will continue. Several factors could curtail housing sales, including wage stagnation, runaway inflation, homebuilding supply chain interruptions and labor shortages, and the specter of rising interest rates.

But just as low interest rates failed to stimulate demand for housing during the Great Recession, it is possible that rising interest rates, if kept in check, won’t reduce demand for housing in 2022, largely due to the growing population of households needing homes. Between 2010 and 2020 as recorded by the U.S. Census, the U.S. population grew by 7.4% which equates to 22.7 million people. This is the slowest recorded growth since the 1930s’ Great Depression, especially when compared to the baby boom of the 1950s when the population grew by 18.5% in the 1950s. Household formation increased by 10.1 million, the fewest since 1950. Compare that to the 1970s when 16.9 million households were added, according to Pewresearch.org.

During the Great Recession and recovery, families doubled up in homes. In 2016, 20% of the U.S. population lived in multigenerational family households, up from 12% in 1980,. Many of the largest emerging generation, the Millennials, were forced to delay marriage, childbirth, and homeownership. While 76 million Baby Boomers drove new housing construction during the 70s, 80s, and 90s, when over 37 million new homes were built, 87 million Millennials face a market where only 6.9 million new homes were built between 2010 and 2020, according to Statistica.

There are “currently 45 million people between 30 and 40 years old in the US, or 3 million more than just five years ago,” according to Globest.com. “The median age of first-time homebuyers is 33, and over the next five years the number of people in that age group is expected to climb by another 2 million.” These Millennials want to make up for lost time. Thirty seven percent of homebuyers currently are Millennials, making them the leading driver of homebuying.

The National Association of Home Builders reports that between 1961 and 2000, housing starts averaged over 1.5 million a year, but since 2006, they’ve been nowhere near that high and labor shortages and supply chain interruptions guarantee that construction won’t get back up to speed for some time to come. This means demand for housing will continue and prices will rise, although possibly not as fast as in recent years.