How Will Skyrocketing Home Prices Fare in 2022?

2022 kicked off as I imagine all Mondays after a New Year’s Eve party should… with stories to tell.   This of course coming from the girl who was in bed by 8:30pm.  There’s the continued rally of the stock market, the unknown impact of Covid’s rapid spread, the story of shipping containers and their effect on the cost of everything, the Fed’s monetary policy, where home prices and interest rates are headed, and of course the million-dollar question… when will we get more housing inventory?  I do love forecasting, in fact it literally brings me joy, but ultimately, it’s a fool’s errand.  This market has more complexity and uncertainty than ever before.  I mean a year ago, we thought we’d take our shots and herd immunity would reintroduce stability, a new normal. Instead, today, 2022 will be defined by its speed of change.  It will require more adaptability and flexibility from all of us.  So instead of running from the fool’s errand, let’s jump face first into the stupidity of forecasting with question Number 1…

Where will interest rates go?

In November 2021, the Fed announced an immediate taper to their purchase of mortgage-backed securities and treasuries.  Fed Chair Jerome Powell had been warning of this eventuality for over 18 months by his not even thinking about thinking about it, to thinking about it, then talking about it, to actually doing it.  There was nothing immediate or surprising about their taper, except an assumption that it would start in December instead of November and ease over 8 months instead of doubling down in 5 months. The Fed’s slow easing into a tighter monetary policy kept the stock market rallying as it hit record highs 68 times and closed with a 27% gain in 2021.  A hot economy and rallying stock market would typically correspond with higher interest rates; but instead 2021 started with a 30-year fixed rate of 2.625%, the 17th consecutive record low and ended at 3.125%, a rate still below the previous historic low of 3.31% in November 2012.

As the Federal Reserve continues its tapering; we will see more market volatility on interest rates, unprotected by the Fed’s sweeping purchases.  The first day of 2022 demonstrated this as investors put money on the economy overcoming the latest surge in Covid cases, lifting the stock market and moving money from bonds into the frothy returns of stocks.  This pushed rates up .25% in a single day.  This trend is expected to continue through the end of the taper in March, with many forecasters signaling higher rates into 2022, maybe as high as 4%.  What’s not being discussed as much is what happens when the Fed moves from tapering to raising the Fed Rate.  While the Fed Rate is a short term, overnight rate, its manipulation is meant to ease inflation and slow down the economy, which affects long term rates.  Inflation is the arch enemy of long-term bonds as it decreases the spending power of their fixed returns.  Historically when Fed Chairs increased the Fed Rate to control inflation, spending did in fact decrease, the stock market declined, mortgage rates lowered, and in the case of Volcker and Greenspan, the economy went into a recession.

I am not saying we will go into a recession; but do see the economy slowing down. I mean, it has to.  People are spending like they won the lottery.  Oh wait.. they did…government stimulus checks, PPP funds, off the chart returns in the stock market and almost free borrowing has the economy spending like there are no consequences.  As the economy slows, it would not be surprising if rates lowered, but from what level?  So if rates go up the first half of 2022 or even through summer; Fall could see rates retreating to where they are now, which will help with affordability and offset question Number 2…

Will home prices keep going up?

Yes. Next question. 

Okay.. Seriously.  How high can they go and when will the bubble burst?  2021 ended the year with December’s median closed price up a whopping 20% (19.78%) year over year.  This finalizes DMAR’s 11 county 2021 median price increase at 17% (16.67%).  This is after 2020’s double-digit increase of 16%.  The 30-year historical average is 6%.  Demographics, low mortgage rates and Denver’s lifestyle attraction all fueled the appreciation fire.  This will not blow out easily.  Many economists are forecasting appreciation in the single digits for 2022.  I think 2022 will have a first half and a second half when it comes to appreciation.  The first half will continue to have strong demand pressure on an extremely limited supply.  December 31st 2021 ended the year with a historically low 968 single-family homes and 509 attached homes for sale.  I am reminded that there are 3.3 million people in Denver’s Metro and 1.4 million households.  December typically sees less homes come on the market and this year was no exception.  New listings were down 29% with only 2,652 new listings, yet 4,504 families celebrated closings and another 3,321 families put a home under contract.  Demand is not slowing; it’s only limited by what’s for sale.  What will put even more pressure on January’s inventory, is the unimaginable tragedy of the Marshall Fire.  As thousands of people are displaced, many will look for a replacement home as it will take years to rebuild.  Those buyers were not in the market a week ago; and together with others who wanted to wait until after the holidays will push home prices higher.  As interest rates rise and seasonal inventory comes on the market, home prices will moderate, but with a median 5 days in the MLS and .33 months of inventory, we have long road to a balanced market.  Which leads to my Last Question…

Should I sell now?

I’m getting that question a lot lately, both from sellers and real estate agents.  Is now the right time to sell, or will home prices keep going up?  Yes, home prices will keep going up, so will interest rates for right now.  So the answer is.. it depends.  If you want to sell and move, especially out of state, now is a great time.  Rates are still historically low, inventory has literally never been lower, and the demand is strong, both demographically and situationally. 

If you are looking at selling now or in the Spring, again, it depends.  Prices will keep going up, but with more inventory comes more choices and less multiple bids.  So, if you have the right house in the right location waiting will not hurt you.  On the other hand, if you have that one-of—a-kind special house, maybe right now is your best option.

If alternatively you are looking at your home as an investment and tempted to think this might be the height of the market and time to get out.. I will say hold on to that home as it will pay dividends the stock market never can.  I’ve done the math.. and given the choice, putting $30,000 down on a $525,000 home would have yielded you a 20% increase of $105,000 in equity over the last year.  If you put that same $30,000 in the stock market at the very bottom in March 2020 and picked all the right stocks; you would have received a 95.5% yield or $28,650 in returns.  The power of real estate is leverage.  Plus, as forecasts go, some are thinking the stock market will lose 10% later this year as it corrects.  Forecasting is a fool’s game.  But just in case, I know where I’m putting my money.

Well, that’s a wrap for this month’s Market Trends update.

It’s my pleasure to keep you updated.

Nicole Rueth
Producing Branch Manager with The Rueth Team of Fairway Mortgage