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Real Estate Trends To Watch In 2022

If omicron (and future variants of the novel coronavirus) does not require more federal intervention, experts say they expect to see 30-year mortgage interest rates of 3.5 percent in 2022

If only we could foretell the future, we’d have bought Apple stock at the start of the pandemic.

While we can’t look forward with that degree of certainty, Ilyce had some interesting conversations with real estate experts and industry observers at the recent National Association of Real Estate Editors conference about what real estate trends might take over the headlines in 2022.

If you’re thinking about buying, selling or investing in residential real estate this year, keep these trends in mind:

Trend 1: iBuyers are evolving…

iBuyers are real estate companies that allow consumers to basically buy and sell on demand. They will buy your home for a price that their algorithms say is correct, allowing you the freedom of making a non-contingent or cash-like offer at will.

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But over time, some iBuyers have shifted their business models. Knock began as a traditional iBuyer, but over the past two years has evolved into a mortgage lender. The company will preapprove you for a mortgage and provide you with a bridge loan for the down payment, allowing you to buy your new home first. Then, they will help you get your home prepped and staged to sell. And, if necessary, they’ll buy your home if no one else will — something Knock CEO/co-founder Sean Black said has happened only a handful of times.

Of course, just because you call yourself a real estate technology company, also known as “prop-tech,” doesn’t mean you always get it right. Zillow shut down its iBuyer division, Zillow Offers, at the beginning of November, acknowledging a potential loss of hundreds of millions of dollars, and said it was cutting its workforce by 25 percent.

Trend 2: Interest rates are rising (this time, for real)…

Since the Great Recession, mortgage industry observers and economists have annually foretold the rising of interest rates. In 2010, 30-year mortgage interest rates were around 4.69 percent but fell to the mid-3 percent range by 2012, according to Rocket Mortgage, and mostly stayed there. At the end of 2018 and the beginning of 2019, mortgage rates briefly hit 5.34 percent.

They quickly declined, and in January 2020, mortgage rates were back at around 3.7 percent. And then the novel coronavirus hit, the Federal Reserve Bank lowered the federal funds rate to between 0 and 0.25 percent, and mortgage interest rates dropped below 3 percent.

What happens now? Lawrence Yun, the chief economist of the National Association of Realtors, and Mike Fratantoni, the chief economist of the Mortgage Bankers Association, agree that interest rates will rise. And Fed Chair Jerome H. Powell’s pronouncement that the Federal Reserve will look to raise the federal funds rate three times in 2022, while phasing out its bond-buying program, makes it likely that mortgage rates will rise.

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If omicron (and future coronavirus variants) does not require more federal intervention, Yun expects to see 30-year mortgage interest rates of 3.5 percent in 2022. In the meantime, lenders will be laying off more loan officers and other staffers as refinancings dwindle. They’re hoping the purchase mortgage market stays red hot.

Trend 3: Millennial and Gen Z home buyers may find buying is unaffordable…

If interest rates rise much, millennials and Gen Z home buyers will find it increasingly unaffordable to purchase first homes. And millennials account for the majority of home buyers at the moment.

U.S. home values appreciated at an annual rate of 18 percent in October, according to CoreLogic, which was the highest level recorded in the 45-year history of the index. If you were looking to buy a single-family house, those appreciated at a rate of 19.5 percent, another record high.

That sort of growth, coming on the back of several years of double-digit price appreciation, is unsustainable. Since home prices are closely tied to income, something has to change: Either people will have to earn more money, interest rates will have to stay low, or home prices will have to come down to get everything back in balance.

In the meantime, the United States is about 5.24 million homes short (rentals, townhouses, condos and single-family detached houses), and builders are focusing on higher-end developments. After all, if you’ll get the same profit out of a million-dollar house as in building three or four $250,000 homes, which would you choose?

Trend 4: Cash-out refis are back.

According to CoreLogic, a leading real-estate-analytics company, homeowners with mortgages saw their equity increase by more than 31 percent in the third quarter. The Homeowner Equity Report showed “a collective equity gain of over $3.2 trillion, and an average gain of $56,700 per borrower, since the third quarter of 2020.”

No wonder cash-out refinancing became a hot commodity in 2021. Black Knight, a leading provider of technology, data and analytics solutions, reported that tappable equity surged $254 billion to an all-time high of $9.4 trillion. Its latest “Mortgage Monitor” report says cash-out refinances pulled the highest “quarterly volume of equity in 14 years.”

Trend 5: Build-to-rent homes rise in an unaffordable housing market…

As home prices rose dramatically over the past few years, many millennials began to find themselves priced out of the housing market..

Take Boise, where the typical home now costs $519,081 and skyrocketed 35.6 percent over the past year, according to the Zillow Home Value Index. According to Mark Meyer, a principal and chairman of the board of TGB, a landscape architecture firm, the average price of a home in Texas has increased by 35 percent.

“In Dallas, you can’t buy a townhouse for less than $280,000 … Land prices went up during covid, and that affects the sales price of a house. We have a huge affordability issue,” he said during the NAREE conference.

While our nephew is living the Instagram lifestyle, traveling the Western United States and living out of his truck, most people prefer to have a home with walls, floors, a ceiling and indoor plumbing. So, if you can’t afford to buy, you’ve got to rent.

There are approximately 43 million rental properties in the United States, and about 34.5 percent of Americans rent, a number that has been steadily rising over the past few decades. According to RCLCO, the real estate consulting firm, about 22 million of those are single-family rental homes. And the number of single-family rental units being built is on the rise. RCLCO estimates that single-family rental homes now represent about 5.1 percent of all new single-family home construction, up from 3.5 percent in the 2000s.

Not everyone is happy with large private equity and hedge funds engaging builders to build single-family rental homes.

“It’s the most anti-American thing in the last 50 years,” said Alex Kamkar, managing shareholder for Bold Fox Development, based in Texas. He notes that the investment world is “changing the economics and those rents will never come down,” adding that the “rents being charged for these communities are so high that tenants can’t save enough for a down payment.”

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For now, this trend looks well-funded and unstoppable. And in the future? Kamkar predicted that the build-to-rent movement “would go poorly. There are so many A-list build-to-rent [communities] that will become the slums of the future,” he added.

Trend 6: Covid-19 is a trend-accelerator and a change-maker…

According to the Counselors of Real Estate annual report on the Top Ten Issues Affecting Real Estate, covid-19 has not only been a trend-accelerator, but has forced fundamental economic structural change.

The report details how the foundations of the economy are now in flux. Employers can no longer take “cheap, pliant labor for granted.” The movement toward hybrid or remote work has confused the expected demand and use of both commercial and residential real estate. And as we’ve all seen, supply chains remain under pressure or are broken.

Two years ago, no one could imagine that the world would very nearly shut down, that offices would close and employees would be sent home to work remotely. Or, that employees would choose not to come back, putting small business owners, restaurants and other business service providers at deep risk of failure.

As a trend accelerator, covid-19 pushed millennials to buy homes in suburban and rural areas. Previously, younger Americans gravitated to city centers, with walkable neighborhoods, public transportation and plenty of entertainment options and restaurants. They weren’t the only ones, of course. American adults of all ages suddenly desired more space.

Covid-19 also accelerated an extreme version of political polarization, the Counselors of Real Estate report noted.

For real estate investors, “persistent pandemic uncertainty raises real estate investment risk” across the board. Commercial property owners are focused on retaining tenants, managing cash flow and training and retaining labor. Small residential landlords, who perhaps own a few properties, are focused on tenant management and getting the rent paid, while waiting for eviction moratoriums to lapse.

And covid-19 underscores the top issue affecting real estate over the past two years: remote work and mobility. As we ended 2021, the Counselors of Real Estate noted that just 36 percent of office workers were back in the top 10 markets, versus 25 percent overall. Eighty-three percent of companies are permanently shifting to a hybrid work model, with dire implications for all sorts of real estate: residential, commercial, medical, education and retail. Companies like Google have indefinitely postponed its employees’ return to the office.

Satisfaction with remote work remains high, according to a number of recent surveys. Goodhire’s recent survey found that 68 percent of employees would choose remote work versus being in the office, while 85 percent believe their colleagues and other employees around the nation prefer working remotely rather than working from the company office. And 61 percent would take a significant pay cut to stay remote.

If these numbers continue to hold up, they’ll have a profound impact on the size and location of new homes and the amenities they include for decades to come. Real estate trends have already profoundly shifted to accommodate the pandemic.