2022 Spring Housing Market - What You Can Expect

Spring is generally the busiest time of the year for the real estate market. In the last couple of years the U.S. housing market saw unprecedented growth during the pandemic. Home prices grew 19.2% year over year in January 2022, up from 18.9% in December, according to S&P CoreLogic Case-Shiller Index. And many are curious to see which way the market heads this spring. 

Over the past few weeks mortgage rates have posted their largest jump since the ‘90s as the Federal Reserve raised the interest rates to slow inflation. As of April 11, the average 30-year fixed mortgage rate stood at 5.25%-- up from 3.11%. The rising mortgage rates are expected to affect the real estate market resulting in higher monthly payments for the property over time. 

We also know that the housing market has not kept up with the demand after the Great Recession in 2007. Construction of new housing has slowed in the past 20 years. According to Realtor.com U.S. is short 5.24 million homes and the supply chain disruptions may further slow down new construction. With millennials and gen-z ready to enter their home-buying years the demand for move-in ready homes will only continue to rise.

Given the rising interest rates and the supply and demand imbalance it is hard to predict which way the wind blows. 

We sat down with Arvind Mohan, Kiavi’s chief operating officer to discuss the current housing market and how our customers can help home buyers access move-in ready homes. 

Q: Arvind, you work closely with our customers and you are familiar with the market dynamics. What should we expect from the spring housing market? 

A: We expect it to be a seller’s market this spring as well, largely driven by inventory shortage and supply/demand imbalances that continue to persist. The supply chain constraints may cause delays for home builders to bring new homes to market in order to meet the demand for move-in ready homes. This also serves to buffer home prices and while not as large as the last couple of years, home prices are expected to appreciate anywhere from 5%-10% this year. Real estate investors bought a record share of U.S. homes in the fourth quarter of 2021, and given the potential inflationary environment, we expect investors to continue to play a significant role in the market. We are closely monitoring macroeconomic trends and the Fed hiking cycle - how these impact affordability, mobility, and labor markets will be key beyond this spring.

Q: You mentioned supply chain disruptions, how does that affect the spring housing market? 

A: After the Great Recession builders had slowed down new construction. As a result, the U.S. is now over 5 million housing units short. Although builders are now firing all cylinders to catch up and complete houses to meet the demand, the supply chain issues are significantly slowing down the process. And we expect supply chain disruptions to continue, at least through this home buying season.

In addition to supply-chain constraints slowing down the inventory of new homes coming on the market, the rise in mortgage rates will be an important factor to consider. The rising interest rates are already pricing out first-time home buyers. It may be relatively easier for them to consider a renovated home which generally averages $28k1 less than new construction, and may be readily available. 

Given these factors, the inventory or lack of, and supply-demand imbalance will play a key role in keeping upward pressure on home prices, albeit to a lesser extent than the prior two years. 

Q: How should REIs adjust to the changing dynamics?

A: Given the changing dynamics I would recommend that the REIs pay close attention to their acquisition and exit strategy. Consider multiple exit strategies so you can pivot and prepare to meet the changing market needs. I would also suggest that you evaluate timelines for your projects, underwrite with slightly increased renovation costs and factor in delays that may be caused by supply chain disruptions. 

I would encourage REIs to also keep an eye on a couple of trends that have emerged over the last two years during the pandemic. According to a recent report by John Burns Real Estate Consulting, a third of US homes for sale in January were bought by real estate investors. Given that we are seeing the rise of investor buyers in the housing market, especially institutional investors, it will be critical to align with a reliable partner to gain access to timely capital that gives REIs the ability to compete. 

And secondly as remote work becomes a permanent option for many people, you may continue to see migration patterns to low density and low cost metros, which may be worth exploring.

We recently covered different exit strategies in our recent blog and I encourage REIs to be flexible with their strategy and adjust as needed to maximize returns. 

Q:  Thanks Arvind. Any closing thoughts?  

A: Investing in real estate is generally seen as a good inflation hedge. As a landlord you also have the ability to potentially increase rents annually to keep up with inflation. But it is important given the current environment to stay aware of macroeconomic trends, monitor mortgage rates and their related impacts.

Every market is different and local dynamics play a big part. I recommend that REIs use their local market knowledge and be flexible with their exit strategy to unlock the full potential of their real estate investments. This will be critical to their success. 

1Based on data sourced from Kiavi and top home builders report

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The above is provided as a convenience and for informational purposes only; it does not constitute an endorsement or an approval by Kiavi of any of the products, services or opinions of the corporation or organization or individual. The information provided does not, and is not intended to, constitute legal, tax, or investment advice. Kiavi bears no responsibility for the accuracy, legality, or content of any external content sources.