While American consumers are embracing freedom from post-COVID restriction, there are mounting concerns that inflation might take the wind out of the sails of consumer spending in 2022. What’s the impact on residential real estate?
Here is a closer look at what we see happening in the housing market:
Rents have become a primary source of inflationary pressure, as evidenced by the Consumer Price Index (CPI). According to a recent CNBC article, rents are up 10.2%, accounting for about one-third of the latest CPI report. And these pressures will likely persist into 2023, as rent hikes have still not taken effect for many Americans, and the delayed impact of eviction moratoriums on rents will generate continued inflationary pressure next year. The Federal Reserve is attempting to stem inflation with interest rate hikes. But Fed hikes — and their impact on long-term interest rates — are also pricing some out of the real estate market.
As mortgage rates have eclipsed a 10-year high — and done so in surprisingly quick fashion to start 2022 — they have started to impact segments of the real estate market. The 30-year Freddie Mac fixed-rate loan as of April 21 was nearly 5.11%. In a housing market where a majority of the offers being accepted are cash with no financing, we’re witnessing the strength of “tappable equity” in the U.S., which topped $9.9 trillion in 2021 (Tappable equity is the amount people can borrow while still maintaining at least 20% equity in their homes. Homeowners can access these funds through tools such as home equity loans, home equity lines of credit, or cash-out refinances.)
While it will take time to work through this supply of cash for equity-positioned buyers, traditional financing buyers are still out there; as rates rise, the ability of traditional buyers to afford certain price points diminishes as payment totals increase. The U.S. housing market needs to stabilize. The continued imbalance of supply and demand, and its impact on rapid rise of median home prices, is not a healthy long-term trend. Based on the decline in mortgage applications across the country, it’s evident that rising rates are making an impact. The tight supply is keeping competition fierce, and keeping prices rising into the middle of 2022.
New challenges have emerged in 2022. Last year, new construction offset much of the pressure brought on by a short supply of standing inventory. But this year, continued and worsening supply chain issues, labor shortages, and the rising cost of construction materials, have limited that relief and caused a wider supply-and-demand imbalance. Developers and builders moved through lots and newly completed homes in 2021 at a pace that had not been seen in more than a decade. Today, the process of getting a new project from planning to actual vertical construction is much longer and leads to further bottlenecks. This bodes well for existing homeowners, as the upward pressure on prices is likely to stay strong into the second and third quarters.
With all the challenges stated above, investors are staying focused on residential real estate. This is primarily due to inflation and the fact many feel safer investing in real estate than other asset classes. While the stock market has been hot, many economists anticipate a correction. With inflation being persistent — and expected to worsen before easing later in the year — real estate appears to be the desired hedge against the other forces. With rents rising across the country, investors see strong opportunities in residential real estate. One example is the trend toward BFR (Build for Rent) communities. At the same time, the supply side challenges do not seem to have an end in sight, with challenges continuing to mount that would further limit the acceleration of new inventory.
Brandon Wells is president of The Group Inc. Real Estate, founded in Fort Collins in 1976 with six locations in Northern Colorado. He can be reached at email@example.com or 970-430-6463.