2021 was pretty wild in the real estate world. Home values increased to record highs, and inventory was so low that homes had multiple offers on them within hours of hitting the market. This unusual market has led many casual real estate observers to fear a massive crash in the next year, saying that these home values are unsustainable. Are they right? Will we see a crash in the upcoming year? Let's look at what we know and what we can expect for the real estate market in 2022.
Will There Be More Foreclosures in 2022?
One of the reasons many fear a housing market crash in 2022 is the end of the mortgage forbearance program that was started as part of the CARES Act in 2020. As a response to the pandemic and many people either losing jobs or having their income severely impacted, the government stopped foreclosures. Homeowners who could not make payments would be able to take advantage of a mortgage forbearance. With a forbearance, your mortgage payments are paused, but once the forbearance ends, the homeowner has a couple of options: pay the missed amount, sell the home, or risk foreclosure.
The initial fear was that every single homeowner who was in forbearance would eventually lose their home to foreclosure and that the massive increase in foreclosures would cause the housing market to crash, similar to what we saw in 2008. However, the data does not support that claim.
4.2 million homeowners took advantage of the forbearance program, and now, as the program is set to expire, only 1 million homes are still in forbearance. That equals only 2% of all mortgaged properties, which means that if every single house that is currently in forbearance goes into foreclosure, that is not enough to make a dent in the incredibly low housing inventory and will not bring home values down.
Finally, as of today, there are 35,000 active foreclosures. 73% of the borrowers in foreclosure have at least 50% equity which means they can sell their home for market value and come out with cash in the bank. Most of the homes in foreclosure are vacant properties, meaning that if they were to sell, there is not a family left without a home.
Have We Hit The Peak Before A Market Correction?
Everything is more expensive today, except for borrowing money. Low interest rates are one of the drivers for the considerable increase in property values. Since it is less expensive to get a mortgage, borrowers can afford a higher purchase price. However, these low interest rates will likely be coming to an end sooner than later.
Many experts predict that interest rates will be around 4 % by the end of 2022. That translates into about $100 more per month on the average mortgage payment. Since the cost of everything else has increased as well, that extra $100 may be more than the average family can afford. Still, this does not mean that the market will crash. Experts agree that values will likely rise in 2022, but the amount they predict ranges from 5-15%. So while we will not continue to see the growth explosion we saw this year, we have not yet hit a peak in the market.
Will Rental Prices Come Down In 2022?
Rental prices have become much more expensive in the last year, and the bad news is that it will not change in 2022. Even though the end of the mortgage forbearance won't affect the resale market, those who decide to sell will likely become renters. That means there could potentially be close to one million new renters, leading to higher prices due to the increase in demand.
Another factor causing rental rates to increase is that home values have increased. Rental rates tend to be closely intertwined with home values since landlords need to profit from their investment. Since home values increased about 20% in 2021 and we can expect anywhere from a 5-15% increase in 2022, we expect rental rates to increase by close to that much as well. Bottom line, if you're a renter and don't see yourself purchasing a home in the next few years, try to negotiate a long-term lease as soon as possible so you won't be affected by the increase in rental rates.
Is There Any Good News Related To The 2022 Housing Market?
The real estate market has been pretty wild and a little bit unpredictable, but that is not to say that it has been all bad news. Sellers will continue to have the upper hand in 2022 and will be able to make a nice profit on their homes. We anticipate that homes will continue to sell quickly and receive multiple offers.
Something that could help homebuyers in the next year or two is that hopefully, as supply chain issues get sorted out, the cost of home building materials will come down. Once this happens, the price of new construction homes will also come down. This decrease may not become a reality until the end of 2022, but it is still something to keep an eye on if you are planning to purchase new construction in the future.
Lastly, homeowners and investors should take a sigh of relief, at least for now, since it does not seem like a significant real estate crash will happen, at least not for a while. Even with the increase in interest rates, home values likely will not come down since there is simply not enough inventory to satisfy the demand for homes.
2021 was unlike anything we've seen in the real estate industry, but 2022 probably won't be quite as exciting. Homebuyers who could not get into a home in 2021 will likely face similar frustrations in 2022. There are just not enough homes available for sale, either new construction or resale, to cause the market to slow down, and certainly not enough to signify an impending crash.