Commentary
Yankees legend Yogi Berra once said: “It’s tough to make predictions, especially about the future.” Nonetheless, I provide my forecast for the housing market below.
First, let’s explore how we arrived where we are today.
Understand that three fundamental value drivers are: scarcity, utility, and demand. Let’s parse all three in order to draw our trajectory of future house prices.
Scarcity
I’m not predicting a housing price crash. The real crash in real estate has already happened—and it’s even worse than you think.
Many prognosticators called for a price crash by now. It didn’t happen. Some did not consider that the government will jump in with air cushions and safety nets (mortgage forbearance, eviction moratoriums) to see that people don’t lose their homes. Others didn’t foresee the unprecedented monetary stimulus.
Few realize that the housing crash has already occurred! It is a supply crash. This is the crash that one must respond to. It’s this dearth of supply that prevents a price crash.
Many economists consider a crash as a 20 percent loss of value or quantity. But U.S. housing supply recently plummeted nearly 64 percent. The active listing count of 1.36 million in September 2019 fell off a jagged cliff to 492,000 in April 2021. It’s barely rebounded since. If you’re looking for a crash, that was it. In my opinion, this era’s housing crash is already over.
This supply crash is worse than a price crash. What does it say about a nation that cannot adequately house its population? Food, shelter, and safety are basic human physiological needs at the base of Maslow’s hierarchy. Housing is two of the three!
According to research from Realtor.com, America is undersupplied by five million homes.
Remarkably, as if supply weren’t low enough, the higher mortgage rates that many expect next year correlate with an even lower housing supply. If you don’t understand why, you actually have the answer inside of you. Perhaps you’ve just never asked yourself the right question.
Say that you’re a homeowner with a mortgage rate of 3 percent. If interest rates jump up to 5 percent, how motivated are you to sell and move? Not very likely. That’s because selling your home means you will lose your 3 percent rate and pay 5 percent. You’d have to pay more just for an equivalent replacement home.
When fewer people put their homes on the market, then there is even—you guessed it—less… available… supply. This is why higher mortgage rates correlate with lower housing supply.
Utility
Utility means “usefulness”. Real estate’s utility increased in pandemic times. Now, a home is more than where you live and sleep. It’s also increasingly where you might work, exercise, home school your children, or have a greenhouse.
Housing is a non-discretionary good. You cannot “sit out” the housing market. Whether you own, rent, live with your parents or under a bridge, you are even interacting with real estate as you read this now.
Beef is discretionary. If it becomes scarce or expensive, you can eat chicken. Nectarines aren’t mandatory. If prices shoot sky-high, you can eat apricots without substantially diminishing your quality of life. Real estate is inescapable.
Understanding real estate’s greater scarcity and heightened utility, let’s look at the third value driver—demand.
Demand
America’s population keeps growing by 1 to 2 million people annually. They will all need to live somewhere.
We are in the midst of a five-year period (2019-2023) in which the five largest Millennial birth years (1989-1993) are hitting the all-important first-time home-buying age of 30. This big age cohort is in prime household formation years.
There won’t be enough homes to satisfy all of that demand next year.
Homebuilders cannot keep up, citing shortages in labor and materials like: roof trusses, drywall, kitchen cabinets, and door hardware. Alternatives like 3-D printed homes, tiny homes, and shipping container homes all have substantial limitations.
You can demand something all that you want, but you need the capacity to pay. With inflation at multi-decade highs, more dollars in an economy provide this ability to pay more.
Now that we’ve established that the three fundamental value drivers of scarcity, utility, and demand provide substantial support for home prices, let’s draw some conclusions and reveal the prediction.
Note that I “keep my eye on the supply” because it is virtually impossible to change that measure quickly.
Low supply creates the stage for bidding wars. These bidding wars are fueled with: a strengthening economy, monetary inflation, demographic demand, and move-up homebuyers deploying their record equity levels. This should help propel prices to rise faster than historic norms again next year.
However, I doubt that prices can rise at the 15-20 percent clip that they have this year. At some point, there’s an affordability constraint.
My U.S. National Median Housing Price Forecast is that prices will appreciate 9 percent to 10 percent next year. Substantially higher mortgage rates may not arrive in 2022. I don’t expect them to rise more than 0.5 percent.
For the properties that you own, congratulations! Nine percent appreciation means that if you’re leveraged 4:1, you would enjoy a 36 percent gain on your equity.
If you also believe that higher housing prices and higher mortgage rates are coming next year, it’s the season to put purchases and refinances in the pipeline now.
