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Matthew Gardner’s Top 10 Predictions for 2022

Matthew Gardner’s Top 10 Predictions for 2022

1. Prices will continue to rise

There are some who believe that U.S. home prices will drop in the coming year given last year’s extremely rapid pace of growth, but I disagree. I don’t expect prices to fall; however, the pace of appreciation will slow significantly, rising by around 6% in 2022 as compared to 16% in 2021 (nationally). As such, agents need to be prepared to explain this new reality to their clients who have become very accustomed to prices spiraling upward. Those days are likely behind us—and it’s not a bad thing!

2. Spring will be busier than expected

The work-from-home paradigm is here to stay for the foreseeable future, and this could lead to increased buyer demand. Many companies have postponed announcing their long-term work-from-home policies due to the shifting COVID-19 variants, but I believe they will soon off er more clarity to their employees. Once this happens, it will likely lead to a new pool of home buyers who want to move to more affordable markets that are further away from their workplaces. I also expect to see more buyers who are driven by the need for a home that is better equipped for long-term remote working.

3. The rise of the suburbs

For a large number of people whose employers will allow them to work from home on an ongoing basis, remote working will not be an all-or-nothing proposition. It will be a blend of working from home and the office. I believe this will lead some buyers to look for homes in areas that are relatively proximate to their office, such as the suburbs or other ex-urban markets, but away from high-density neighborhoods.

4. New construction jumps

I anticipate the cost of building homes to come down a bit this year as inflation finally starts to taper, and this should provide additional stimulus for homebuilders to start construction of more units. Material costs spiked in 2021 with lumber prices alone adding about $36,000 to the price of a new home. This year, I’m hopeful that the supply chain bottlenecks will be fixed, which should cause prices to moderate and result in a drop in building material costs.

5. Zoning issues will be addressed

I’m optimistic that discussions around zoning policies will continue to pick up steam this year. This is because many U.S. legislators now understand that one of the main ways to deal with housing affordability is to increase the supply of land for residential construction. Despite concerns that increased density will lower home values, I believe existing homeowners will actually see their homes rise in value faster because of these policies.

6. Climate change will impact where buyers live

Now that natural disasters are increasing in frequency and climate risk data is starting to become more readily available, get ready for home buyers to require information from their agents about these risks and their associated costs. Specifically, buyers will want to know about an area’s flood and fire risks and how they might impact their insurance costs and/or their mortgage rate.

7. Urban markets will bounce back

While increased working from home can, and will, raise housing demand in areas farther away from city centers, it may not necessarily mean less demand for living in cities. In fact, some urban neighborhoods that were once only convenient to a subset of commuters may now be considered highly desirable and accessible to a larger set of potential home buyers. At the same time, this could be a problem for some distressed urban neighborhoods where proximity to employment centers may have been their best asset.

8. A resurgence in foreign investors

Foreign buyers have been sitting on the sidelines since the pandemic began, but they started to look again when the travel ban was lifted in November 2021. Recently, the rise of the Omicron variant has halted their buying activity, but if our borders remain open, I fully expect foreign buyer demand to rise significantly in 2022. Keep in mind, foreign buyers were still buying homes sight unseen even when they were unable to enter the country, and this will likely still be the case if borders are closed again.

9. First-time buyers will be an even bigger factor in 2022

Once remote working policies are clearer, we should see increased demand by first-time buyers who currently rent. In 2022, 4.8 million millennials will turn 30, which is the median age of first-time buyers in the U.S. An additional 9.4 million will turn 28 or 29 in the coming year. I believe this group is likely to contemplate buying sooner than expected if they can continue working from home in some capacity. Doing so would allow them to buy in outlying markets where homes are more affordable.

10. Forbearance will come to an end

Forbearance was a well-thought-out program to keep people in their homes during the height of the pandemic. Some predicted this would lead to a wave of foreclosures that would hurt the housing market, but this has not been the case. In fact, there are now fewer than 900,000 U.S. homeowners in forbearance, down from its May 2020 peak of almost 4.8 million, and this number will continue to shrink. That said, there will likely be a moderate increase in foreclosure activity in 2022, but most homeowners in this situation will sell in order to meet their financial obligations rather than have their home repossessed.

See Transcription Below

Hello, there. I’m Windermere Real Estate’s chief economist, Matthew Gardner. Some of you may possibly remember that last year, I put a top 10 list of things for brokers and their clients to be on the lookout for in 2021. And because so many of you told me how useful it was, well, I decided that an update was in order.

So without further ado, here’s my list of things for all of you to be on the lookout for in 2022. First up, prices will continue to rise. Now, I’m pretty sure that most of you are already saying to yourselves, “Well, that isn’t much of a surprise.” But it is worthy of making it onto my list as whispers have been growing louder from some who are becoming far more vocal about their belief that we’re set for home prices to drop, given the extremely rapid pace of growth we saw last year.

Now, I certainly don’t see prices falling this year, but I have no doubt the pace of appreciation will slow significantly. In fact, I expect home prices to rise by around 6%, versus 16% in 2021. And the primary reason for this slowdown, is that we are testing affordability levels across much of the country. And not just in markets you would expect to see affordability issues, such as Los Angeles, San Francisco, New York, Miami, or even right here in Seattle. But the share of households making local median income, who are able to afford a median priced home has dropped significantly in markets that you would not expect. And here, I’m talking about areas like Corvallis, Oregon, which was technically the least affordable market in the country in the third quarter of last year. Also, pretty high on the list of unaffordable markets were Salem and Eugene, also in Oregon, Boise, Idaho, as well as Tacoma and Bellingham right here in Washington state.

The bottom line, is that some of the heat will come off the market this year with price growth slowing. And listing brokers need to be positioned to explain this to their clients who have become very accustomed to seeing prices spiraling upward. Those days, I’m afraid are highly likely behind us and it’s not a bad thing. Number two, the spring buying season may come earlier and be bigger than you are expecting.

As I suggested several times last year, the work from home paradigm is real, and I see this potentially increasing buyer demand for several reasons. As we all know, many companies were planning to announce their work from home policies after Labor Day last year. However, the rise of the Delta variant of COVID-19 forced them to delay those decisions until the start of this year. And assuming they don’t further postpone implementing new policies due to the Omicron variant, workers will get more clarity regarding work from home. And when they do find out exactly how often they’ll have to go into their offices, well, I see many of them immediately start to search for new homes that are likely to be further away from their workplaces and into more affordable markets. I also expect some to start looking for a new home, not necessarily because of price, but because their current homes just aren’t equipped for remote working.

I, for one can tell you that spending more than a year working from my dining room table, it’s hardly the most stimulating of experiences. So my advice would be for you to be prepared for what could be a very robust and possibly exceedingly early spring buying season. Next up. Number three, the rise of the suburbs. Now, this really is a follow on from my last point. You see, I believe that for a very exceptionally significant percentage of employees whose jobs do allow them to work from home, remote working will not be an all or nothing proposition.

Rather, it will be a blend of working from home a few days and in the office for the balance of the week. And this will lead would be buyers to target locations that are still relatively proximate to their offices, but away from high density areas and into the suburbs or other ex-urban areas that aren’t that far away from work. And we are already seeing signs of this. I’ve taken a close look at records from the postal service, who have a trove of data from people submitting change of address requests. And it showed me that so far, 84% of households who have already moved actually stayed in the same metro area as their old home. Now, of course, some will be able to work from home permanently and this will allow them to look even further afield. So I also expect to see greater interest in secondary and tertiary markets that had previously been generally overlooked. And the big gamers here will be markets like Breckenridge, Colorado, Payson, Arizona, the [inaudible] Astoria in Oregon, Wichita Falls, Kansas, and believe it or not, Spencer, Iowa.

These are locations that will certainly benefit economically from the influx of new residents, but I would offer a word of caution. As buyers from high price locations move into these markets and snap up what they believe to be relatively cheap homes, where they will push prices up significantly. And this can hurt existing residents who had always thought that they would be able to buy a home when the time was right. But this veritable wave of out of towners may well start to price them out of the towns that they actually grew up in.

And we are again, seeing this already in markets such as Riverside, California, where buyers leaving the Los Angeles basin are snapping up homes. And this has impacted affordability, which is down to just 26% or as we discussed, Corvallis, Oregon. Just 6% of home sold in the third quarter of last year were technically affordable to households making median income. That is pretty scary. Okay. Onto number four, new construction jumps. I am looking for the cost of construction to come down a bit this year as inflation finally starts to taper, and this should provide additional stimulus for home builders to start construction on more units.

Material costs spiked through the COVID period with lumber prices alone, adding about $36,000 to the price of a new home. But this year, I’m hopeful that the bottlenecks in the supply chain will be fixed. Prices should then start moderating. And this will flow through to building material costs, which should start to drop. And because of this, I anticipate single family starts to come in at around 1.22 million units this year, and 1.24 million in 2023. These are numbers that we haven’t seen since 2005. Moving on to number five, big push to address zoning issues that limit development. Although we’ve already seen significant changes in some markets, I expect this to become more of a focal point this year. Back in 2018, the first market to eliminate single family zoning completely was Minneapolis. Now, you can build duplexes or triplexes in any area that was previously zoned for single family homes only. In 2019, Oregon followed suit.

And last fall, Governor Newsome in California signed similar bills, SB8, nine, and 10 into law, which all took effect January one of this year. What has clearly started to become apparent to legislators, is that housing affordability is an incredibly significant issue and the only way to get around it is to add to housing supply. And I believe that this will actually have a significant impact in more inexpensive markets, where contrary to the popular, albeit incorrect belief, that additional density will lower the values of existing homes. I actually see existing homeowners in these markets, I think they’re going to find their home values rising at a faster than average pace because of these policies. And that’s something that is not being talked about.

Number six, climate change will start to seriously impact where buyers choose to live. Now that natural disasters are increasing in frequency and climate risk data is starting to become more readily available, get ready for home buyers to require more information from their brokers about these risks and their associated costs. Specifically, buyers will want to know about an area’s flood and fire risks and if that might impact their insurance costs or even the mortgage rate that they will get. You see, there’s a practice known as blue lining. Where banks or mortgage lenders draw lines of risk around certain neighborhoods or even streets often without clear disclosure. And this can impact the mortgage rate that buyers are offered.

Although, more home buyers are not worried about climate change than currently are, the tide, excuse the pun, really is changing. And this is being led by millennials, but it’s also high on the list of concerns from Gen Y buyers and even gen Z, who, although still far too young to be in the position to buy a home, will be very focused on this when they get to the ripe old age when home ownership becomes important to them. Number seven, urban markets bounce back. While increased working from home can and will raise housing demand in areas further away from city centers, it may not necessarily mean less demand for living in cities. In fact, some urban neighborhoods may even see demand rising as highly desirable city neighborhoods, which were once only convenient to a subset of commuters, become more accessible to a larger group of potential new residents.

At the same time however, this could be a problem for some distressed urban neighborhoods where proximity to employment centers may have been their best asset. And I also believe that we may see a more unique shift in select cities, who historically, have relied on the tech industry to provide significant demand for urban housing, but work from home has led them to lose some of these residents. But where tech work and demand may drop, it will likely be replaced by workers employed in the biotech industry. You see, these are people who still have to go to their labs and most can’t work remotely, and they will be most noticeable in markets such as right here in Seattle. Which by the way, is the fastest growing area for life science employment in the country. But I also expect to see cities like Atlanta, Miami, Dallas, and even Madison, Wisconsin benefit from this trend, too.

Number eight, a resurgence in foreign investors. Prospective buyers have been sitting on the sidelines since the pandemic began, but they started to look at again when the travel ban was lifted last November. Of course, all this has been put on pause because of the rise of the Omicron variant. But if we don’t close our borders again, I fully expect that foreign buyer demand will rise significantly this year. Now, I would add that foreign buyers were still closing on home purchases even when they were unable to enter the country by buying site unseen, only having viewed the home remotely. And this is likely to still be the case even if we end up shutting down our borders again. Number nine, first time buyers will be an even bigger factor in 2022. Earlier, I mentioned that I anticipate a demand surge when work from home policies are clearer, and some of this growth in demand will come not from existing homeowners, but from first time buyers who currently rent.

4.8 million millennials will turn 30 this year, that’s the median age of a first time buyer in America. But an additional 9.4 million will be celebrating their 28th and 29th birthdays this year, and I would suggest that these younger buyers are likely to start a search for their first homes earlier than normal if they can buy further out and into markets which are affordable. And finally, number 10, forbearance will end and it’s going to be okay.

I talked about this extensively last year with my position being that forbearance was a well thought out program to keep people in their homes, even if they were not able to make their mortgage payments. Well, many thought that this would ultimately lead to a wave of homes being foreclosed on and that would hurt the housing market, but that has absolutely not been the case. In fact, as of recording this video, there are now fewer than 900,000 owners still in the program. That’s down from its May 2020 peak of almost 4.8 million households who are in forbearance, and this number will continue to shrink.

But even if some owners simply can’t get back onto their feet, I don’t expect to see a significant increase in foreclosure activity as they exit the program. Yes, foreclosures will rise this year, but only back toward their long-term average. But there will not be a wave of foreclosures simply because many homeowners who can’t get things straight with their lenders, or they’ll decide to sell their homes in order to satisfy their obligations and not have their homes repossessed. This is already happening, and we know this by looking at the makeup of homes currently for sale.

See, the number of homes listed for sale that are priced in the bottom 5% of their respective markets is jumping. In fact, it was up by 13% in the third of last year. So your clients should not wait for any sort of wave of cheap, bank owned homes to come to market because I just don’t see it happening. And there you have it, my top 10 for 2022. I certainly hope that you found this year’s list as interesting as last year’s. As always, I wish you all every happiness and success this year. And as always, if you have any thoughts about my list, do feel free to reach out to me. I would love to hear from you. Bye now.

 

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