Initially, record low mortgage rates paved the way for white hot demand. An unbelievable 17 record lows were achieved after the country slipped into a pandemic back in March 2020. It is no longer low mortgage rates that are stoking the fires of demand; instead, it is the severe inventory shortage. Today, inventory has risen slightly to 1,537 homes, but that is still far from normal. The three-year average prior to the pandemic (2017 through 2019), there were 5,400 homes, or an extra 251% more. There are simply not enough homes available to match demand.
The supply chain problems have been well documented across the United States and around the globe. One of the hardest hit industries is new cars. The supply of available new cars has dwindled down to record lows. As a result, dealers are adding a “market adjustment fee,” a lineitem cost above the MSRP. The fee ads anywhere from a few thousand dollars to as much as $20,000 more for a popular model. It has everything to do with supply and demand. Consumers looking for a new car are confronted with very few options and rising car prices. To get their hands on one, many are willing to pay the surcharge. Housing feels like it too is suffering from the supply chain problem with seemingly nothing available to purchase. Last year the inventory in San Diego County started the year at an all-time low with 2,556 available homes. It hit 2,175 on April 1st, rose and peaked in August, and then continued to plunge until only 1,254 homes were on the market on January 1st of this year, just a few weeks ago. Today, there are 1,841 homes, adding 587 during the first few weeks of the year. The difference between this year and last year’s record low is striking. There are 575 fewer homes today, 24% less. Every price range has been impacted except for homes between $750,000 and $1 million, where there are 16% more than last year. Comparing today to every year since 2017 is mind blowing. In 2019, prior to the pandemic, there were 5,072 additional homes on the market, 276% more, three-and-a-half times the number of homes today. In 2017, 2018, and 2020, there were around 2,800 additional homes on the market in each of those years, about 153% extra, two-and-a-half times more than today. Comparing today’s level to prior years illustrates just how acute today’s inventory crisis has become. The inventory was already trending lower prior to the pandemic, but the pandemic accelerated the issue as fewer homes were placed on the market despite soaring demand. In 2020 and 2021 combined, there were 12,800 fewer FOR-SALE signs compared to the average number between 2017 and 2019, 12% less.
The active listing inventory increased by 388 homes in the past couple of weeks, up 27%, and now sits at 1,841 homes. It is still the lowest reading for this time of year since tracking began 10 years ago. It is the Winter Market. There just are not enough homes that come on the market during the winter months until the housing hits the second half of March. This is coming on the heels of the slowest housing patch of the year, October through December in terms of the number of homes placed on the market. With today’s heightened demand, homes are placed into escrow as fast as they are coming on the market, like a revolving door. It is just too difficult for the inventory to rise much until spring, so expect it to remain flat or even drop for the next several weeks. The only caveat to this is rising rates. If rates rise another half a point and breach 4%, then the inventory will rise sooner. Last year, the inventory was at 2,416, 21% more, or an additional 425 homes. The 3-year average prior to COVID (2017 through 2019) is 5,402, an extra 3,561 homes, or 193% more, nearly triple compared to today. There were a lot more choices back then. For December, there were 2,056 new FOR-SALE signs in San Diego County, 136 fewer than the 3-year average from 2017 to 2019, 6% less. Every single missing sign magnifies the inventory crisis.
Demand, a snapshot of the number of new escrows over the prior month, increased from 1,744 to 2,022 in the past couple of weeks, adding 276 pending sales, up 16%. With such a limited number of homes available, just about everything that comes to market is being thrown into escrow. Homes start coming on the market at a faster pace as the month of January progresses, gaining steam throughout the month of February as well. Expect demand readings to surge over the next four weeks. With surging demand and a flat inventory, the market will only grow hotter. Market times typically drop to its lowest point of the year sometime in March.Even with rates rising in the past four weeks, it has not dampened demand at all. It would take a much higher climb for the impact to be felt within the real estate trenches. Last year, demand was at 2,445, 21% more than today. Year over year comparisons will be off through February due to market changes because of COVID. A much better comparison is looking at the 3-year average prior to COVID (2017 to 2019), which was 2,308 pending sales, 14% more than today. With a larger surge in the inventory compared to the surge in demand, the Expected Market Time (the number of days to sell all San Diego County listings at the current buying pace) increased from 25 to 27 days, its lowest level for this time of year. At 27 days, it is an insane, Hot Seller’s Market (less than 60 days) where there are a ton of showings, sellers get to call the shots during the negotiating process, multiple offers are the norm, and home values are rising rapidly. Last year the Expected Market Time was at 30 days, similar to today. The 3-year average prior to COVID was at 72 days, much slower than today and approaching a Slight Seller’s Market (between 60 and 90 days).
The shock of going into a pandemic may have disrupted the housing market in 2020 for a few months, but there was no disruption in 2021. Demand surged despite COVID’s winter wave, summer delta wave, and the current omicron wave. If anything, it has kept a lid on mortgage rates. The only thing that will slow the speeding housing freight train at this point is rising rates; yet, as long as COVID continues to be a threat, rates will have a hard time rising much from their current record lows. Housing is one of the strongest sectors of the economy, yet the overall U.S. economy has been on the mend as well. Retail sales have soared. Unemployment has dropped substantially. Job openings are surging. The number of homeowners in forbearance dropped below 600,000 by the end of December, and the vast majority of the nearly 7 million exits are either performing or paid off their mortgages in full. The economy has dramatically improved. Inflation may have risen to highs not seen in decades, but mortgage rates have not budged, indicating that investors are confident that the inflation pressures will subside and eventually retract sometime in 2022. The low interest rate environment will continue and will be a tailwind that will continue to fuel the incredible run on housing. As a result, the local housing market is going to be HOT in 2022. Here is the forecast:
Active Inventory – the year will begin around 1,300 homes, the lowest start by far since tracking began in 2012. It will be 47% less than the 2,465 start to 2021, the prior record low. With very few available homes to purchase, housing will be extremely hot on January 1. The theme for 2022 will be the same as 2021, not enough homes for buyers to purchase. Instead, they will all be in escrow. Expect the active inventory to peak around August eclipsing 5,000 homes, well below the over 7,300 home peak prior to COVID.
Demand – with an anemic inventory and the historically low mortgage rate environment, buyer demand will be extremely strong from the start of the year through the Summer Market. With tremendous buyer competition, buyers will be willing to stretch above the asking price; so, expect appreciation around 8 to 10% for the year. Demand will be at its strongest, and most appreciation will occur from January through July, and then will downshift during the Autumn and Holiday Markets.
Housing Cycle - the housing market will follow a normal housing cycle. The strongest demand coupled with plenty of fresh inventory will occur during the Spring Market. This will be followed by slightly less demand and a continued new supply of homes in the Summer Market. From there, demand will drop further along with fewer homes entering the fray in the Autumn Market. Finally, all the distractions of the Holiday Market will be punctuated with the lowest demand of the year and few homeowners opting to sell.
Closed Sales - the number of successful, closed sales will decrease 3 to 6% compared to 2021, with around 38,700 (2021 had the most sales since 2005).
Luxury Market – luxury housing will continue to be exceptionally hot, yet sales will drop slightly from 2021’s record year. The Spring Market will be the strongest for luxury and will become a bit more sluggish with more Wall Street volatility during the second half of the year.
Interest Rates – look for mortgage rates to continue to remain at historically low levels until the pandemic improves dramatically, most likely during the second half of the year. Yet, rates will have a hard time surpassing 3.5%. Even with Federal Reserve reversing their MBS (mortgage-backed securities) purchases and raising the Federal Funds Rate (short term rates), and heightened inflation, long term mortgage rates will continue to bounce between 2.75% to 3.5%. If mortgage rates remain at these low levels, housing will be insane.
Distressed Inventory – do not expect a wave of foreclosures. The number of active forbearances will dwindle to nearly none. As home values have surged, very few homeowners are under water, which is one of the main reasons the vast majority of forbearance exits are either performing on a monthly basis or paid off their loans. The foreclosure moratorium resulted in very few foreclosures in 2021, so expect slightly more in 2022. Nonetheless, the total numbers will be very low and undetectable in the broader housing market.
The bottom line: 2022 will continue where housing in 2021 left off, INSANELY HOT. It will be an Insane Seller’s Market (an Expected Market Time below 40-days) from the start of the year through the Summer Market. Multiple offers and bidding wars will be the norm for homes priced below $2 million. Once again, the market will heavily favor sellers and buyers will have to pack their patience to isolate their piece of the American Dream and take advantage of record low mortgage rates. From mid-August on, the beginning of the Autumn Market, housing will evolve into a Hot Seller’s Market (an Expected Market Time between 40 and 60 days) with a bit less activity, not quite as many multiple offers, and fewer homes selling above their asking prices.
Everyone is acutely aware that home prices have been soaring for the past year-and-a half. They have far exceeded the runup in values prior to the Great Recession. This has many people on edge, wondering how values can continue to rise beyond their current record highs. In focusing just on prices, it is no wonder they fear an end to the pandemic housing run.
Merge extremely strong demand with an anemic supply of available homes to purchase, a record low, and housing will continue to soar for not only the remainder of this year, butthrough 2022 as well. Today’s Expected Market Time has dropped to 20-days, one day higher than its lowest on record established on April 1st. At 20-days, it is an insanely HotSeller’s Market. Anything below 60-days is considered a Hot Seller’s Market. When it drops below 40-days it has reached the level of an insane market. At 20-days, housing is nearly indescribable. It is where every home is greeted with a ton of showings, sellers get to call all the shots during the negotiating process, multiple offers are the norm, and home values are rising rapidly.