Real Estate Inflation and Housing Market Predictions for 2022

dotloop

February 07, 2022 | comments

A Deep Dive on How Rising Interest Rates and Cost of Goods and Services Are Impacting Real Estate

The housing market forecast for 2022 looks promising for investors, rental owners and home values, while supply chain issues still stymie new construction starts and rising interest rates hobble some first-time homebuyers.

Earlier this year, a new variant in the COVID pandemic, coupled with lingering supply chain issues, a flow of federal stimulus money and a rising demand for goods and services brewed the perfect storm to push inflation to 7.5% – the highest it’s been in 40 years. So what are the current housing market predictions and how will inflation and the 2022 market forecast affect agents and brokers?

While inflation – defined as an average increase in the prices for goods and services in a given economy over a set period of time – will drive interest rates higher for buyers, it can also raise property values for homeowners, lower their loan-to-value debt, and provide new opportunities for savvy agents and brokers who pivot quickly.

Housing Market Predictions for 2022

During the Great Inflation years of the Seventies, home prices kept pace with the relative size of the economy. Now, as the cost of goods and services continues to rise in 2022, home prices are expected to follow the same upward trajectory – despite higher interest rates potentially softening demand.

Zillow forecasts 16.4% home value growth in 2022 with 6.57M existing home sales – the highest number of home sales in any year since 2006.

Single-family homes, condos and multi-family properties are expected to particularly outperform in face of inflation. While fewer homes are selling above list price, tight inventory and elevated demand due to remote work and historically low interest rates will continue to fuel some bidding wars, particularly in the spring and summer months.

Zillow also predicts the surge we saw in the Sunbelt states in 2021 to extend to smaller Southern cities, such as Fort Myers and Sarasota, FL.

In addition, experts predict 30-year mortgage rates will rise to around 3.6% by the end of 2022, which could pump the brakes on buyer demand and stage rents for as high as double-digit increases.

“This has basically never happened before,” Jay Hatfield, the founder and CEO of Infrastructure Capital Management, recently reported to NBC News. “We’ve never had this kind of national inflation for rent.”

New construction, on the other hand, is expected to suffer as the cost of materials, construction wages and machinery costs increase.

Following a boom period in spring 2021, the increased cost of labor and material costs is now limiting the number of new developments, which, in turn, will apply even more upward pressure on rising rents and property values.

Tourism and travel might also take a hit, thus reducing demand for vacation rentals, tourist destinations and even retirement communities, according to the Million Acres Real Estate Investing site.

Real Estate Rentals Rising With Inflation

As inflation rises, rents will increase to keep pace with the cost of goods and services. In October 2021, CoreLogic reported rental prices increasing 10.9% nationally YoY, the fastest year-over-year growth in more than 16 years.

Many experts forecast a 7% increase or greater in rent prices, this year.

Would-be buyers finding it difficult to secure a loan or who find their salaries and wages failing to keep pace with the aggressive rise in inflation will either need to lower their budget or rent.

More employees working from home could also trigger a spike in rentals as migrating residents “try out” a neighborhood or community before they buy.

And, as mortgage forbearance terms come to a close, even more homeowners are expected to join the leagues of listers/renters.

As a result, 2022 is shaping up as a great year for investment in real estate income properties, including multi-family dwellings as an income source and a hedge against inflation.

Should Homeowners Rent or Buy Real Estate as Inflation Rises?

Prospective homeowners who are weighing their options may want to consider the cost of purchasing at a higher interest rate versus paying a rent that could fluctuate.

“Homes are expensive now, but for most people, the comparison that is most important is how the cost of homeownership is going to compare to the cost of renting,” says Zillow Senior Economist Jeff Tucker.

According to a 2018 RentCafe analysis of U.S. Census data, millennials will have spent approximately $100,000 on rent by the time they’re 30 years old. As a rule, housing costs should not exceed more than 30% of a person’s income, yet millennials typically spend 45% of their income on rent between the ages 22-30, while Generation X spends 41%. This leaves very little savings for a down payment.

More recently, RentCafe found the number of millennials who are earning a higher income and are renting instead of buying is increasing. In fact, the number of rental applicants who earn more than $50,000 a year is at its highest mark in five years.

While a rental could offer the wiser option for those less sure of their location over the short term, as a rule, purchasing a home typically makes more sense when the homeowner is planning on staying there for at least three and, preferably, five years.

Meanwhile, an office, retail or apartment rental may present an attractive opportunity for the investor.

Here are a few ways agents can cash in with a rising rental market during the current inflationary economy:

5 Inflation-Proof Real Estate Opportunities

1. Help Convert Renters into Homeowners

While mortgage rates are on the rise, paying a monthly rent also has its downsides. Agents should remind and educate would-be buyers who opt to sit on the sidelines that fixed-rate mortgages do not increase while rents most likely will.

There’s also the lost opportunities that they’ll sacrifice by opting out of homeownership. Rent paid every month, for instance, does not build equity like a mortgage. Nor will renters receive the tax breaks or appreciation that can make owning a home pay off in the future.

As noted, the first question you should ask potential buyers then becomes, “How long do you plan to stay in the home?” If the answer is at least five years — and in some cases, as low as two or three years — then buying a home may make more sense for your customer.

Zillow offers an online calculator, allowing renters to calculate how long they need to live in a home before the purchase costs outpace the benefits of renting.

Either way, in this rent-heavy market, agents may want to spend a little more time with these clients, especially millennials, who are thinking about buying but may be reluctant right now to pull the trigger given rising rates.

Check in regularly with prospects and share listings that may make sense for their budget range. Do the math for them to help them see the affordability and realize the long-term gain of homeownership.

“I tell all first-time homebuyers to buy equity while you can, especially young first-time buyers,” says Justin Bailey of Bailey & Co. Real Estate, Knoxville, TN. “Buy something you can get a great return on in three-to-five years.”

2. Consider Rental Management

With the unpredictable nature of the current economy combined with a strong rental market, some agents may find rental management a great way to foster relationships with renters before they’re ready to move into homeownership.

“You want to stay in the rental market loop,” says Cassandra Joachim, director of business development at Intellirent, “because one day those renters will be looking to buy.”

Intellirent, a marketing, screening and application management platform for agents and property managers, for instance, integrates with dotloop, allowing agents to create loops from applications and streamline the rental process, from managing lease signing to storage.

3. Host a Rent vs. Homebuying Seminar

Homebuying seminars offer a great, cost-effective way for agents to build their sphere of influence in any economy. For example, Andrea T. Fowler of New Avenue Realty Group at Keller Williams reached out to her local library to present her homebuying seminar for free.

“It gave me an avenue to meet people that I never knew and provided a place for the community to learn about buying a home while getting to know me,” she says.

Fowler has held staging classes at a local home furnishings store and DIY workshops at hardware stores. She’s also partnered with new construction builders, presenting in new model homes to reach prospective homeowners who might be looking for an agent.

Presentations provide a great opportunity for agents to partner with any number of ancillary, third-party providers, from lenders and contractors to stagers and financial advisers.

The workshop or seminar presentation format also helps position you as an authority or thought leader – rather than a salesperson who’s just selling a service. If done correctly, the leads will come naturally.

4. Sell Multi-Family Property Rentals

Rental properties, especially those with short-term lease structures, offer fat margins to investors looking for recurring income.

Unlike some commercial properties that tend to have multi-year tenants, residential rentals typically renew leases annually, providing landlords with the ability to adjust for inflation. Multi-family dwellings, such as apartment complexes, also tend to have a high turnover rate at 47.5%, providing owners with the opportunity to reset rents.

5. Consider Real Estate Investment Trusts (REITs)

REITS, companies that own or finance income-producing real estate across a range of property sectors, sell shares in their trusts, with most trading on major stock exchanges. REITs can offer attractive opportunities during an inflated economy for investors who may reap handsome dividends.

However, demand for other high-yield assets like treasury securities also become attractive when interest rates rise and can lower the share prices of REITs as a result. The cost of borrowing debt will also increase and banks may offer fewer loans to investors. It’s also important to keep in mind that the tax rate on REITs typically exceeds the 15% rate at which most dividends are taxed.

That said, REITs align closely with market demands and appreciation of physical real estate and can present a favorable option for those investors who want to diversify across asset types.

Forecasts for the Future of Inflation and Its Effects on Real Estate

Many factors will determine how long inflation endures and its effects on the real estate market.

If mortgage rates rise too dramatically, the demand for those loans will decrease. And if demand for new homes reaches a significant breaking point, home prices could falter.

Much of the future depends on supply chain issues as well. If goods and services continue to be heavy on demand and short on supply, high inflation may be a long-term fixture in our economy.

Eric Diton, the president and managing director of investment advisory firm The Wealth Alliance, notes that while inflation will continue to remain stubborn, he forecasts supply chain and employment issues will begin to resolve around the latter part of 2022 and thus ease the economic pressure.

Higher prices, at least for the short term, will be a reality. Yet, agile agents and brokers who help customers find home – whether it’s in a rental where they wait out the high interest rates or a property where they can lock in a 30-year rate – will find real estate may provide the respite their consumers need to ride out the storm with the most promising outcomes.