What will the year 2022 bring us in the real estate market? Last year was great for selling a home but not a great year if you were trying to buy one. We saw home prices increase significantly as tight inventory nationwide (down 23% year over year) caused price increases everywhere. The lingering effects of covid kept inventory lower as some potential sellers opted not to put their homes on the market out of caution. In addition, tight inventory had the twin effect of preventing people from moving as finding a new home became more difficult.
Although Chicago’s prices rose more modestly, prices still ticked up. Buyers should be thankful we aren’t in Phoenix where home prices increased 33%—a national most! The place we saw most price increases were for newly constructed homes, as commodity prices increased, most notably in lumber, but in many other key areas related to construction. Inflation is certainly a concern but is expected to level off over time. One of our mortgage partners believes 2022 will surpass 2021 in purchase originations and will reach 1.74 trillion, a record. Of course, many buyers today are paying cash to win bids, so the true number spent on home purchases will be much higher. It is widely expected that inventory will be better in general in 2022 than in 2021, but it's really anyone's guess moving forward how that will play out in each area of the city or town in the wider metro area. For instance, the downtown core high rise market struggled last year and in some segments we saw inventory as high as 50 months of supply. For the same data set that number is now much lower (closer to 8 months of supply thank god!), still high but jumping to a more "normal". More on supply below.
It's difficult to look forward as opposed to backwards, but it is our belief that in such a strong housing market, sellers- particularly retiring boomers- will take advantage of the good conditions and sell while they can. A survey of Compass agents saw 66% believe inventory will increase, no doubt informed by their relationships with their clients who intend to sell.
Looking at absorption rates, something we do for our sellers and buyers alike, tells us how quickly supply is being purchased by the buying public. Last year we were almost always in a sellers market, or less than 4 months of supply (with exceptions like the example above). Often that number was much lower. That number usually climbs up substantially in the first few months of the year, the typical selling season. We are already seeing new listings tick back up, seen on slide 4 of this graphic from Chicago’s MLS. Under contract listings also jumped in the first week of 2022, although more modestly than in 2021. We will have to monitor the market to truly find out if competition will moderate with increased supply or not.
Lawrence Yun, head economist for the National Association of Realtors, says the market should normalize. “All markets are seeing strong conditions, and home sales are the best they have been in 15 years,” Yun said. “The housing sector’s success will continue, but I don’t expect 2022’s performance to exceed 2021’s.”
NAR’s profile of home buyers and sellers, an annual report now in its 40th year, found that more than a third of the buyers in 2021 purchased their homes for above asking price. First-time buyers increased to 34 percent last year, up from 31 percent in 2020. That was the largest jump since 2017. The typical first-time buyer was 33 years old. Already, the new listings coming to market are getting snatched up quickly. This article from Crain’s speaks to the still voracious appetite from buyers, particularly ahead of the coming interest rate rise. While there will no doubt be rising interest rates in 2022, expected to top out close to 4% (currently about 3.4%), money is still quite cheap when looked at historical numbers (my parents first rate was 18%!). However the perception will likely cause a frantic spring buying season. American’s purchasing power will remain strong, as suggested by Mike Fratantoni, chief economist at the MBA. He forecasts that millennials reaching peak first-time homebuyer age, a strong job market (and wage growth) and continued increases in home prices will all contribute to a record-breaking 2022.
In summary, rising mortgage rates should moderate prices, but low inventory will remain a problem. Each segment in the market is different depending on location and price points and what you are trying to do so it's best to connect with your local Realtor to see what the best strategy is for you. Our Olive Well agents are happy to chat, so please don’t hesitate! Click Here to learn more about the author, Chicago real estate broker Charlie Wood.
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