2022 Marks the End of the Housing Boom

Despite Covid-19 wreaking havoc on the United States economy and subsequently causing a recession and substantial losses in many sectors, the housing market experienced a boom. By the end of 2021, home prices had risen over 18.8%, and homeowner equity had increased over 31%, reaching over $3.2 trillion for the first time in over a decade (Lambert 2022b, Boesel 2021). The impetus for this boom was a rapid rise in the demand for housing, in part due to decreased interest rates, coupled with decreasing supply, which was already at a shortage pre-pandemic, resulting in excess demand and increased prices. However, as we enter 2022 with high inflation rates corresponding to higher mortgage interest rates, the boom has likely reached its peak. Housing price growth will decelerate and present adverse implications for sectors of the economy since housing booms encourage consumer spending and engender economic growth (Lambert 2022a). 

During the pandemic, mortgage rates began to fall, having reached a record low of 2.65% in January 2021 (Desmas 2021). With the inability to afford a home or to cover payments being among the principal reasons Americans cite for previously not being able to purchase a home, new low interest rates eradicate this barrier and make homeownership more feasible by lowering the overall cost (Joseph 2020). This reduction occurred at a critical time given that many millennials were entering their thirties, the prime age for home buying (Lambert 2022b). The demand for housing increased accordingly as evidenced by mortgage applications having risen 33% by August 2021 compared to the previous year (Demsas 2021). 

Heightened demand also likely occurred as a result of Covid-19 due to an increase in the amount of time spent at home, leading many to redesign their working and living environments (Desmas 2021). For example, 14 to 23 million Americans stated in 2021 that they planned to move in response to employment changes allowing them to work remotely in any location (Bedgood 2021).  

In addition to the factors listed above that contributed to the boom, markets were concurrently pervaded by a lack of supply as the demand for housing rose.  While not unique to the pandemic, given a pre-existing housing shortage, it was undoubtedly exacerbated, with the number of homes being built reaching a historic low (Lambert 2022b). In addition, as stated before, many first-time homebuyers entered the market, which further heightened the supply-demand gap, given that they increased demand but not supply.  Overall, based on these factors, the housing inventory fell over 50% from April 2020 to April 2021 (B. Lambert 2022). The classic economic phenomenon followed: high demand and low supply lead to high prices; in this case, prices unprecedented in the past 40 years (Carrns 2022). 

However, these gains seem unlikely to persist in 2022. While only 4 months in, mortgage rates have risen to the highest they have been since 2019, soaring just shy of 4%, and are forecasted to continue to rise throughout the year (Carrns 2022). This is a result of the Federal Reserve’s response to the strengthening employment market and high inflation, causing an increased benchmark interest rate and changes to the 10-year Treasury bond also impacted by inflation concerns (Carrns 2022). In addition, many cite the increased prices resulting from the boom as an impediment, with affordability once again a considerable barrier to homeownership  (Backman 2022). While there is a chance that a select few may wish to jump in and purchase before rates further increase, this would only be feasible for the select few that can afford the current prices. As a result of these changes, only 25% of Americans currently feel it is a good time to purchase a home (Backman 2022). 

While many believe that supply would increase when construction resumes, as society returns to some sense of normalcy, the increased cost of building with inflation has yet introduced another constraint, making it unlikely that supply will change for the foreseeable future.  For example, lumber has increased 114% and steel over 73% ​​(Bernstein et al. 2021). With recent building levels having not been able to keep up with population growth, a shortage could persist (Lambert 2022a). This is one reason why we should not be alarmed nor expect a crash as seen in 2009. Unlike that boom, mortgage standards have remained high, meaning mortgages have not been given to those at risk of defaulting or with low credit scores (Nielsen 2022). Overall, it is likely that values will not decline, but instead the rate of growth in values will begin to decelerate. Estimates show that we have already passed the peak rate of growth. While rates of growth had reached close to 20% during the pandemic, they could return to pre-pandemic levels around 2% to 3%. 

While many industries have profited off the increased spending in the housing market, there are fiscal consequences present for the drops we have already seen and will continue to see. The housing sector accounts for close to 18% of the nation’s GDP and is linked to spending in numerous industries such as moving, construction, home furnishing, utilities, and maintenance (Blythe 2021; Ostrowski 2021). The boom catalyzed revenue increases for many of these industries. For example, US revenues for self-storage and moving services saw a 12% increase in revenue from the prior year in 2021 (Gangloff 2021). Real estate commission, with over 80% of sellers using a realtor, was projected to hit $100 billion for the first time in history in 2021 (Quintana 2021). Furniture and bedding sales increased 4.5% from the previous year to $120.4 billion in 2021 (Fredrick 2021). Home renovation spending grew by 15% (Berg 2021). 

Moreover, the equity that results from the increases in property values grants consumers more comfort and ability to spend. This is a result of the wealth effect, wherein homeowners feel wealthiest and spend more willingly when their assets rise in value. With the increases in equity, many either experience the wealth effect or utilize their equity to make home improvements or to secure loans for spending. However, if the growth in values continues to decelerate in 2022, then the opportunity presented will be minimized. 

Overall, 2021 saw a significant increase in the demand for homes and a decrease in supply as low-interest rates became the norm. Nevertheless, both the high prices caused by this boom and the highest interest rates of mortgages responding to inflation have made home buying both undesirable and unaffordable. While home demand continues to show signs of decreasing, the supply of homes could still remain low due to insufficient buildings that cannot keep up with population growth and the increased cost. Additionally, the growth in home prices is likely to continue to decelerate and reach pre-pandemic levels. However, since supply will remain somewhat consistent and demand will not completely be eradicated, there will be a decline in home values near, but not back to, pre-pandemic values. Consequently, it is possible for sectors that have benefited from the housing boom to see declines, but the impact will again depend on how many people are deterred from purchasing, which has already become a sizable amount. 

References

Bedgood, Larisa. 2021. “2021 Moving Trends.” V12. July 14. https://v12data.com/blog/2021-moving-trends/. 

Backman, Maurie. 2022. “Only 25% of Americans Think Now Is a Good Time to Buy a Home.” The Motley Fool. February 21. https://www.fool.com/the-ascent/mortgages/articles/only-25-of-americans-think-now-is-a-good-time-to-buy-a-home/.

Berg, Nate. 2021. “The Home Renovation Craze of 2020 Isn't Letting up Anytime Soon.” Fast Company. June 25. https://www.fastcompany.com/90649446/the-home-renovation-craze-of-2020-isnt-letting-up-any-time-soon.

Bernstein, Jared, Ernie Tedeschi, and Sarah Robinson. 2021. “Housing Prices and Inflation.” Written Materials (blog). The White House. November 30. https://www.whitehouse.gov/cea/written-materials/2021/09/09/housing-prices-and-inflation/.

Blythe, Bruce. 2019. “Why Housing Is a Leading Economic Indicator.” TheStreet. February 4. https://www.thestreet.com/markets/why-housing-is-a-leading-economic-indicator-14853734.

Boesel, Molly. 2021. “Home Equity Gains Reached New Highs in 2021.” CoreLogic. December 9. https://www.corelogic.com/intelligence/home-equity-gains-reached-new-highs-in-2021/.

Carrns, Ann. 2022. “Rising Mortgage Rates Add to the Challenge of Buying a House.” The New York Times. February 18. https://www.nytimes.com/2022/02/18/your-money/home-buying-mortgages.html. 

Demsas, Jerusalem. 2021. “Covid-19 Caused a Recession. So Why Did the Housing Market Boom?” Vox. February 5. https://www.vox.com/22264268/covid-19-housing-insecurity-housing-prices-mortgage-rates-pandemic-zoning-supply-demand.

Friedrick, Joanne. 2021. “Retailing Rebound Fuels $120.4 Billion in Furniture, Bedding Sales.” Furniture Today. December 22. https://www.furnituretoday.com/research-and-analysis/retailing-rebound-fuels-120-4-billion-in-furniture-bedding-sales/.

Gangloff, Corinne. 2021. “US Revenues for Self-Storage & Moving Services to See 12% Growth in 2021 on 17% Increase in Home Sales.” PR Newswire. November 3. https://www.prnewswire.com/news-releases/us-revenues-for-self-storage--moving-services-to-see-12-growth-in-2021-on-17-increase-in-home-sales-301415903.html.

Joseph, Addie. 2020. “42% Of Non-Homeowners Say This Is What's Preventing Them from Buying a Home.” CNBC. March 2. https://www.cnbc.com/2020/02/28/42-percent-of-non-homeowners-say-what-is-preventing-them-from-buying-a-home.html.

Lambert, Lance. 2022a. “Home Price Growth Decelerates Again-Forecast Models Say the Peak Rate Is behind Us.” Fortune. January 28. https://fortune.com/2022/01/28/home-price-growth-decelerates-again-forecast-models-say-peak-rate-behind-us/.

———. 2022b. “What to Expect in the 2022 Spring Housing Market, as Told by 3 Charts.” Fortune. February 28. https://fortune.com/2022/02/28/spring-housing-market-predictions-2022/.

Nielsen, Barry. 2022. “Why Housing Market Bubbles Pop.” Investopedia. January 9. https://www.investopedia.com/articles/07/housing_bubble.asp. 

Ostrowski, Jeff. 2022. “Housing Boom: What It Means for the Broader Economy.” Bankrate. Accessed March 2. https://www.bankrate.com/mortgages/housing-boom-what-it-means-for-the-broader-economy/

Quintana, Alexandria. 2021. “Total Real Estate Commissions for the US Projected to Hit $100 Billion in 2021 for the First Time Ever, Reinforcing the Value an Agent Brings to the Transaction.” Knock. July 9. https://www.knock.com/blog/total-real-estate-commissions-for-the-us-projected-to-hit-100-billion-in-2021-for-the-first-time-ever-reinforcing-the-value-an-agent-brings-to-the-transaction/.