In this episode of the REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi discuss the economic forces that will shape the housing market in 2022.
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“The current supply-demand imbalance is expected to remain in 2022. No surprise there. Homebuilders are working very hard to bridge the housing supply gap created by a decade of under building, but it will take some time to reduce the housing stock debt in the face of growing millennial demand. The housing market in 2022 is likely to benefit from millennials aging into their prime home-buying years and rising wages. But, of course, you can't buy what's not for sale.” – Odeta Kushi, deputy chief economist at First American
Odeta Kushi - Hello, and welcome back to another episode of the REconomy podcast, where we discuss economic issues that impact real estate, housing and affordability. I'm Odeta Kushi, deputy chief economist at First American. And here with me is Mark Fleming, chief economist at First American. Hi, Mark. It's our last episode of the year. Can you believe it?
Mark Fleming - I can't, Odeta. This year has just flown by. You know what, we've covered all sorts of topics, everything from the Gamestop frenzy and how it relates to innovation in mortgage finance, the economics of FOMO and FOBO. That was a fun one recently. And I do recall talking about bathtubs in a real estate economy episode. I'm pretty impressed by that, too. By the way, everyone, you can check out all of our past episodes on the website, Firstam.com/economics, or, of course, your favorite podcast platform. But, Odeta, can I take a guess at what we might be discussing today?
Odeta Kushi - Please do. Well, since this is our last episode of the year, and we get asked this question all the time at the end of every year, it must have something to do with what will happen next year. Bingo, today we are talking 2022. The Good, the Bad, and the likely for housing next year. You know, John Kenneth Galbraith, a famous economist, once said, "There are two classes of forecasters, those who don't know, and those who don't know that they don't know."
Mark Fleming - And which kind of forecaster are we?
Odeta Kushi - Well, you know, there are point predictions and pattern predictions, I would rather be a pattern predictor. So rather than walk you through numerical forecasts, we'll explain some of the dynamics that are likely to continue to drive the housing market next year. But first, let's set the stage. Mark, if you had to describe the outlook for next year, in one sentence, what would you say? And no cheating with a run on sentence.
Mark Fleming - So no, on the one hand, and on the other, which would imply two sentences, I suppose. Okay, so one sentence, and I'm going to be nice and formal here because we need to get this sentence just right. The 2022 housing market will be characterized by strong millennial demand for homes constrained by an ongoing historic housing supply shortage, which will result in moderating, but still positive house price growth.
Odeta Kushi - Wow, very economist-y. And I counted 32 words in that sentence, so I'll allow it. So it sounds like the 2022 housing market will look a lot like 2021, with some moderation due to the ongoing supply constraints and declining affordability. But that has some implications for home buyers and sellers alike. What is the expectation for existing homeowners, particularly those that may be thinking about selling their homes?
Mark Fleming - You know, I think we could have used that very economist-y sentence of mine for the 2019, 2020 and 2021 outlook. So, I don't know that much has changed in the longer run here in the housing market. But I digress. And let's get back to answering your question. Existing homeowners, this is clearly the good, you referenced earlier, because they have benefited from this hot sellers' market and are likely to continue to benefit next year. How does that benefit happen? Equity gains, homeowners in the second quarter of 2021 had an average of $280,000 in equity. That's a historic high. With house price appreciation expected to remain strong in the next year, this is not going to stop and equity accumulation will show no sign of abating. Wealth is being accumulated right now at an amazing pace that we haven't really seen very much in times past. And, of course, just over 65% - I love your stats Odeta very accurately, are you sure we don't want to add another decimal point to that one? Just over 65% of households in the United States are homeowners. That means almost two-thirds of American households are benefiting with all this wealth creation today. And that's going to keep going next year.
Odeta Kushi - All of that equity. So it may be a great time for some of those homeowners to use that equity to move to something bigger and better, a dynamic that we've referred to as the wealth effect in the past. And we see some evidence of this. We found in the latest existing-home sales report that the increase in home sales relative to one year ago was strongest at the upper end of the market. So, sales of homes priced above $1 million increased nearly 31%. There's my precision again. Followed closely by a 25% increase in the sale of homes priced between $750,000 and $1 million. And, since we know that first-time home buyers generally don't purchase at the higher end of the market, the home sales at these price points are typically occurring among existing homeowners. So they're basically playing housing musical chairs by selling to each other.
Mark Fleming - I don't know why now I have this image of eight-year old birthday parties in my head, playing musical chairs. But, wait, not so fast, or maybe specifically, not quite that easily. Because, just because you have the wealth, with all that equity, and you might want to look to purchase a home that has appreciated in value, so have all the other homes that you might buy, have appreciated in value. Not to mention that there aren't that many homes available for sale. And it matters which ones are for sale. Housing is a perfectly heterogeneous good, as we like to say. For context, in the 1990s inventory turnover, that's the supply of homes for sale nationwide, measured as a percentage of the total residential inventory was about 2.5%. Today, in our October data, we're measuring inventory at one point...oh I love it...1.23%, not 1.24%, not to 1.22%. That means roughly, haha, 123, instead of 250, of every 10,000 homes are for sale. That's near a historic low. You may want to buy something, but you can't buy what's not for sale. And that's a real problem when you have a heterogeneous good, like housing.
Odeta Kushi - So despite all that equity, the fear of not being able to find something to buy may keep existing homeowners staying put. Not to mention rates are expected to rise in 2022. And many existing homeowners have secured historically low fixed-mortgage rates. So there's this financial lock in effect that increases as mortgage rates rise and the size of the mortgage increases. But, even still, the existing owners are likely to be the winners of the 2022 housing market. All that equity allows them to remodel, if they can't move, or they can move to a cheaper area, where their equity can get them a lot more home. But, Mark, not everyone benefits from rising house prices. What's the outlook for first-time home buyers? I mean rising rates, rising prices and limited inventory? Oh my.
Mark Fleming - Oh my is right. First-time home buyers don't have the money from the sale of an existing home to bring to the closing table. The equity that that existing homeowner got when they sold the home, they bring it to the next home. That's not the case for the first-time home buyer. So, with rates expected to rise next year, house price appreciation to remain positive, even if it does moderate some, and the limited supply of homes, especially in the starter home category, that makes it a real struggle for the potential first-time home buyer.
Odeta Kushi - But, there is a bright side here.
Mark Fleming - Yes, I agree that there is a bright side and, since you are one of those potential first-time home buyers, I'm glad you are the optimist. I had Monty Python going through my head right there. Sorry.
Odeta Kushi - I think I have to be an optimist at this point. And, you know, we've talked about this in a previous episode -- the untethering of workers from the office. Workers will likely have greater remote flexibility in 2022, allowing them to work further from their offices. And, actually, our research has shown that even prior to the pandemic, there was a migration to smaller metros and suburbs, which was, of course, accelerated by the pandemic. And we expect this migration to continue as millennials continue to search for more space to satisfy their changing lifestyles. And we have identified some markets where renters can get more bang for their buck, according to our analysis. Not all markets are created equal when it comes to first-time home buyer affordability. The median renter can only afford about 5% of homes for sale in Los Angeles. So that would be a market that's relatively unaffordable to a renter, but the median renter in Buffalo, New York can afford 85% of homes for sale. And other affordable markets, include Pittsburgh, Oklahoma City and San Antonio. So, there's your bright side,
Mark Fleming - Bright side for Pittsburgh, Oklahoma City and San Antonio, among others. Are you planning on moving and not telling me? But, there is another positive? Oh, I saw that pause. There is another positive and that's that wages are likely to continue rising next year, which will, of course, boost house-buying power. So, not all is lost? Will it be able to keep up with rising rates and rising prices? Maybe, maybe not. But not everything is going against that potential first-time home buyer, and don't forget that homebuilders have built a lot of homes, or at least partially built a lot of homes. And they're sitting in the backlog, partially completed. Missing the doors and other building materials, like appliances, that are clogged up in the supply chain issues that we're having today. If those supply chain issues fade, those new homes will be brought to market and they will at least add a little bit of supply relief next year.
Odeta Kushi - Well, I think we said a lot, so let me recap before we wrap up. The current supply-demand imbalance is expected to remain in 2022. No surprise there. Homebuilders are working very hard to bridge the housing supply gap created by a decade of under building, but it will take some time to reduce the housing stock debt in the face of growing millennial demand. The housing market in 2022 is likely to benefit from millennials aging into their prime home-buying years and rising wages. But, of course, you can't buy what's not for sale. House prices are expected to remain positive, but moderate from the pace we've seen in 2021. Thus, buyers will likely still face an ongoing, but less intense, sellers' market, and existing homeowners will continue to benefit from rising equity. But, of course, they too cannot buy what's not for sale. But, you can relocate. Indeed. And, while today we focus on all things housing, the pandemic remains in the driver's seat for the broader economy. The health of the economy is dependent on consumer confidence, consumer spending and the labor market. And all of these factors depend on getting this virus under control. So, that's it from us in 2021. If you have an economics-related question you'd like us to feature on a future episode, you can always email us at economics@firstam.com. You can also keep up with us on Twitter. It's @OdetaKushi for me and @MFlemingEcon for Mark. We'll talk again in 2022. Happy holidays, everyone. Thanks for listening.
This transcript has been edited for clarity.