Housing Crisis 2.0 and Market Predictions for 2022

The housing market is going through another rough patch… 

Whether you’re thinking about buying or selling a home, the trends you’re about to see should be useful. And if you’re just an investor on the sidelines, this research should come in handy as well. 

There’s a lot of housing data out there and it’s tough to sort through… but I’ve done a lot of the legwork for you. Looking at – and understanding – just a few key indicators can help you make better decisions. 

I’ve been following the housing market for over a decade. It’s been a wild ride to say the least. And now, another big shift is underway… 

For quick prediction takeaways, I don’t see home prices dropping a lot at least anytime soon. Although, it’s still a unique housing crisis for the average buyer. This is based largely on decreasing affordability thanks to increasing interest rates and lower home supply. 

U.S. Homes Less Affordable in 2022 

To see the big changes underway, we have to start with the building blocks… interest rates! This isn’t as exciting but as you’re about to see… little changes have a huge impact. 

For example, the average 30-year fixed mortgage rate hit a low back in the start of last year at 2.65%. This is the lowest it’s been in modern history and it’s crazy to think you could lock in such a low rate for 30 years. But over the past year, it’s climbed up to 4.42%… 

housing crisis as fixed 30-year mortgage rates near highest levels in past decade

As you can see in the chart, the mortgage rate is close to the highest it’s been in the past 10 years. And thanks to inflation and signaling from the Fed, it’s likely going higher. 

… but for a better current perspective, let’s take a look at how a jump from 2.65% to 4.42% impacts mortgage payments. And to start, we need to look at average home prices. 

As you can see in this next chart, the recent median sales price for a home in the U.S. is $408,000. For comparison, I’ve also included the average sales price. It comes in even higher at $477,000. 

long-term U.S. housing prices go up and spike higher in 2020-2022

In most places across the U.S., home values have soared over the past year. And looking back even further, home values are up close to 60% from the highs before the 2008-09 housing collapse. With that past housing crisis in recent memory, higher home prices today are crazy to consider. Although, it’s important to note that home prices are still on a better foundation today. 

Getting back to average mortgage payments and for simplicity, let’s use $400,000 for the 30-year mortgage. I’m ignoring down payments and some other smaller factors. Nonetheless, this will show important changes in the housing market. 

Based on the low 2.65% rate last year, the monthly payment would be $1,612. But based on the more recent 4.42% rate, the monthly payment climbs to $1,961. That’s a $349 monthly difference. And over the course of a year, that amounts to paying $4,187 more. And over the full 30 years, home buyers pay an extra $125,600 in interest! 

These huge payment differences all come from 2.65% climbing to 4.42%! 

As you can see, small interest rate changes have a huge impact over time. And this makes homes much less affordable. As interest rates climb, it puts downward pressure on home buying demand. And as mentioned, the Fed will likely continue pushing interest rates up to counter rising inflation. 

This is already starting to put downward pressure on the housing market. And it’s one of the most important pieces to the housing crisis in 2022. On top of that, with home prices higher today, indirect costs climb as well such as property insurance, taxes, etc. Although, those price increases can be a bit delayed. It’s just unfortunate many homebuyers overlook those costs. 

Housing Supply Shortage 

The housing crisis in 2022 falls on most homebuyers today. Unlike the past collapse, we won’t likely see big home price decreases for one big reason. And this is barring a severe recession – which I give a higher probability of happening than I would have just a few months back. 

So, even with decreased homebuying demand due to high prices and higher interest rates, it’s offset by a housing supply shortage. This is helping push home prices higher… 

After the 2008-09 housing crisis, new housing starts dropped to their lowest levels in over 50 years… 

new housing starts recover from lows but still lead to a home shortage

Construction has picked back up over the past decade. Although, the underinvestment has led to a huge housing shortage. And all the while, the U.S. population has continued to climb and more millennials are looking to buy their starter homes. 

Some estimates put the U.S. home shortage around three to four million homes. That’s huge! And it won’t likely be fixed anytime soon. Some supply chain issues are also causing short-term stress. But some of that should hopefully be alleviated in the year ahead. 

Housing Market Predictions 

This all boils down to a housing crisis for homebuyers. The rest of 2022 is only going to get worse for housing affordability. We won’t likely see another big jump in home prices… but increasing interest rates will make monthly mortgage payments much less affordable. 

If you’re on the other side of the equation (you already own your home or are looking to sell), you’re in a good spot. 

For the average American, a home is the most expensive asset that they’ll own. So, it’s vital to do your due diligence before buying or selling. Understanding a few key factors and trends can help you make better decisions. 

Personally, I’m not likely buying a home anytime soon. It’s not because I haven’t saved up enough cash. Instead, it’s the opportunity cost. I’m investing my money elsewhere and when it finally comes to buying a home, I should be able to make an all-cash offer. Although, depending on where interest rates are at that time, taking out a mortgage still might make more sense. 

I shared a video awhile back on why I invest in stocks instead of real estate. Feel free to check that out. And as always, please let me know if you have any comments down below or on YouTube.

Invest mindfully,

Brian Kehm

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