Will there be a Housing crash in 2022?

The last few years have been a wild ride in the real estate and financial world in general. Two years of record-breaking highs in both real estate and the stock market have been fueled by the stimulus to the US economy primarily from the lowering of interest rates by the Federal Reserve which leads to the question:  Are these record-breaking highs the top of a cycle that will lead to a housing crash? The information is cloudy but the answer is that it is unlikely that a real estate crash will happen in 2022.

            While some factors are continuing to give upward pressure to real estate prices, other factors are giving downward pressure. Let’s talk first about the downward pressure.

Firstly, The-Elephant-in-the-Room is the skyrocketing mortgage rate. Over the past few months, the average interest rate went from 3.11 to over 5%. While that doesn’t seem like a lot, it now costs the average buyer an extra 284 dollars a month on a 240k 30-year fixed loan, making home affordability more and more difficult. The rising interest rates are a combination of the FED, inflation, and the 10-year treasury yield, which are also skyrocketing.

The second factor pushing downward pressure is a volatile stock market. People expecting to cash out of their various stock-based investments to be used as a down payment will be less able to do so as their investments lose value.

The third factor pushing downward pressure is inflation. Prices of most things are going up across the board, which directly competes with a consumer’s ability to spend that money on a home, second vacation home, or investment property.

What about upwards pressure?

Firstly, the large upward push is low inventory.  This is being caused by the amount of demand for housing currently in the market. People are trying to buy a house before mortgage rates continue to skyrocket. Houses continue to have multiple offers over asking (not as much more recently), and many people have been out-bid time and time again. This difficulty in securing a home adds to the upward pressure as people are much less likely to leave their current living situation, scared that they won’t be able to find their next home. Another factor leading people to not want to place their home on the market is their current low-interest rates. Since a lot of people refinanced or purchased homes in the high 2%-low 3% range, this low cost of living is not going to be something people want to get rid of.

The second upwards pressure is the price increase in rental rates. It’s no secret that rents have been on the rise. This higher cost of living also adds upward pressure to the housing market as the higher rents make the higher mortgage payments seem more worth it.

Thirdly, we have continued supply chain issues. Supply chain issues have not ceased by any means; in fact, they’re likely to persist for quite a while. China has a strong zero covid policy which is severely dampening the supply of much-needed building materials. This is slowing the speed at which new homes and recently rehabbed homes are hitting the market which of course adds to the low inventory issue.

A fourth contributor to the upward pressure on real estate prices is the quality mortgages that are now available.   After the crash of 07-08, the Dodd-Frank Act was passed to help protect the consumer, seriously regulating what kinds of mortgages banks could offer. Over the past two years, many people refinanced into safe, consistent 30-year fixed mortgages with low-interest rates. Leading up to the 07-08 crash many mortgages were variable rate and given to anyone with a heartbeat. When teaser rates went away and payments skyrocketed, these subprime loans went belly up very quickly. This led to a massive glut of properties on the market all at once, crashing real estate prices. This is not the case today.

 Lastly (for this post), inflation contributes to upward pressure. But wasn’t that downward pressure? Yes. However, while interest rates are sitting around 5% for houses right now, inflation has been as high as 8.5%, which means the real interest rate is actually negative, making some buyers more willing to take on the higher interest notes for the time being.

These are the reasons why I do not believe the housing market is going to crash in 2022. There will be a housing cool down as that is already starting. However, the downward pressure is simply not enough to cause a massive fall in pricing.