I often get asked about what the new year looks like for real estate. That is always a challenging question because the robust market we enjoyed the last several years has been mostly driven by low interest rates that has made home ownership available to a wider range of buyers.
The Fed has been buying up loans and helping to keep the 30 year mortgage rates between 2.5% and 4.5% for nearly a decade now. The government has also spent record amounts of cash to battle the COVID pandemic and that is placing a huge pressure on the economy as inflation has gotten out of hand. Inflation can become a relentless and destructive monster if not handled appropriately. Typically making money a little more expensive will help. Interest rates will have to rise a bit and as that happens those at the lower end of the economic ladder will no longer be a bale to afford a house. As buyers leave the market place, pricing on homes could contract a little.
Inflation can also make it much more expensive to fix up a fixer house and that can lead to lower prices as well for homes that are not in the best shape. New homes will likely face upward price pressure from inflations as the cost of materials rises. Furthering the problem is the supply chain issues that seem to have the Federal Government baffled. That is adding even more inflationary pressure.
I believe that 2022 will see significant increases in the cost of new construction but a serious softening in the price of a fixer house. Now more than ever in the last 20 years, fixing up your house before selling is a very good idea. Well maintained homes in excellent condition should be a great opportunity for following the new home market upwards but older and run down homes may see the bottom fall out from under them as buyers get priced out with higher rates and repair costs sky rocket. The return of investor buyers or the so called "flippers" could happen later in the year if rates rise, inflation contuse, and supply chain issues are not dealt with.
Overall the local market has already seen a slight shift towards the buyers. It remain mostly a sellers market, but much closer to neutral than it has been for the last few years. I have always said I prefer a neutral market as that tends to keep both parties in a transaction reasonable and willing to work with each other. I would imagine that we will see modest growth through the first half of the year with single digit annualize price growth on resale homes and a possible slow down in the second half with very slow price growth and possibly depending on rates some price relaxation.
I would expect to see more modest increases in home values this year than last, but if you remember I said that last January as well. I was dead wrong last January as 2021 saw 18% price growth. But this year is definitely different, we are seeing runaway inflation and continue to have supply chain issues. This is not a sustainable condition for rising real estate particularly older and poor condition properties. New housing could slow down significantly as materials and expensive borrowing cuts into profits. There is only so much a local market can support in price and we are dangerously close right now with new 1500 foot ranch style homes running in the low 500s.
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