So far 2022 has been an interesting year for anyone involved in real estate or the housing market. Despite the Federal Reserve hiking interest rates a few times, housing prices have continued to rise. According to Reuters, the number of home sales and mortgage applications has dropped to the lowest level seen since June 2020. This seems almost paradoxical as, despite home sales dropping, prices continue to increase.
These strange market conditions may be due to several factors. Supply chain issues, inflation fears, the increasing price of oil and raw materials, and other “inflation hedge” assets failing to perform.
Slow Down in Rural Housing Markets?
Covid-19 affected a lot of markets including the housing market. Back in 2020, social distancing edicts were set in place and many offices enacted work-from-home policies. Many took the opportunity to leave the tightly packed and expensive cities for a more suburban or rural existence. Some swapped small Manhattan apartments for more spacious single-family homes in Florida, and many Californians moved eastwards.
According to a report by the U.S. Census Bureau, some of the fastest-growing states were Arizona and Idaho. This was likely due to worker migration from tightly packed cities to much more affordable states mentioned previously.
Life seems to be returning to normal following the Covid-19 pandemic. Travel restrictions are being lifted across the globe, masks are becoming a thing of the past, and many offices are ending work-from-home policies. In addition to this, rising fuel prices may push many back into urban centers as the cost to commute rises.
As such, real estate and housing trends which were popular in 2021, may become less so. We may see an even lower number of property sales in “fly-over” states which were very popular until recently.
Bubble Pop or Pricing Correction?
It is impossible to accurately predict housing prices in 2023 and not even the greatest financial minds can do so. That being said, it isn’t likely for housing to maintain the same rate of growth that we’ve seen in 2021 and 2022. During those years we’ve seen some areas reporting increases as high as 40-50% in real estate. This rate of price growth in any financial market isn’t sustainable in the long term.
The Fed is considering two additional interest rate hikes by mid-July. While these are relatively moderate increases of 0.5% for now, there may be more rate hikes planned. The Federal Reserve’s plan to combat inflation by using interest rate hikes will ultimately have an enormous impact on the housing market.
This will ultimately decide if housing prices will stagnate or decline, and if a decline is on the table, how big of one will we see. Prices could stagnate and remain relatively unchanged, although the chances of this seem slim. A more likely possibility is a healthy correction of about 10-20% decrease in home pricing due to soft demand and increasing supply. The most extreme scenario would be an extreme pricing collapse of 40% or more in average pricing.
The housing market tends to correlate with the stock markets to a certain extent, albeit with a delay. If the housing market does indeed follow the stock market we seem to be facing a correction and possible decrease in pricing.
Rise of Non-QM Mortgages?
Housing prices are still the highest they’ve ever been and rising interest rates are causing mortgages to be even more expensive. With this happening, many Americans will likely be denied mortgages by traditional lenders. As such, the American dream of obtaining affordable housing is drifting farther and farther away for many.
One alternative that may rise in popularity is non-QM or non qualified mortgage lenders. It is important to note that non-QM lenders are not subprime or non-prime lenders for individuals with bad credit scores.
Non-QM lenders typically fill the gap for individuals who may not qualify for a standard mortgage due to strict requirements from conventional mortgage lenders. These lenders are particularly popular among immigrants in the US who do not have an established credit history in the US and self-employed individuals. As non-QM lenders tend to be slightly more relaxed regarding borrower requirements, they can grow in popularity although they may charge slightly higher rates.
The Fed’s Dangerous Game
The changing trends in the housing market depend heavily on the Federal Reserves’ decisions in the coming months. In addition to this, macroeconomic trends such as rising oil prices and the end of work-from-home policies will likely push many individuals back into major cities for employment.
While the housing market may cool down a bit, there will still be many that buy and sell property. Some may make use of non-QM lenders to secure a property. As the wealth of many Americans is tied up in their home’s equity, it would be disastrous to many if home prices decline too sharply.
It looks like the Fed will need to tread very lightly in order to minimize inflation without wreaking havoc on the economy.