For months, sundry forecasters have been predicting a sharp slowdown in the rapid pace of home price appreciation. Indeed, it seems logical that following the recent gigantic run-up, year-over-year gains should “revert to the mean,” falling to mid–single digits or even lower. That has certainly been the pattern historically: Superhigh prices lure existing homeowners to plant “for sale” signs, and builders get active, filling their subdivisions with new ranches and colonials. While supply expands, demand cools because the big jump in prices and the rise in monthly payments means that fewer people in each income tier can afford to buy. High prices set in motion the process that tames the rampage.
The big increases roll into February
But today, a host of special conditions are giving this boom far longer legs than in any boom of the past. The latest evidence of this run’s amazing durability is new data from the American Enterprise Institute’s Housing Center. The AEI tracks “mortgage rate lock purchase” figures that show the trend in ranks of Americans taking out new home loans. The data also shows the prices they’re paying. The rate lock purchase information provides a window into where prices and sales volumes are going in six weeks to two months when the sales actually close. The AEI shows the rate lock “purchase” volumes weekly, and estimates from the contract prices where the official closing prices will land in the following month or two. Keep in mind that by mid-February, average home prices have already soared 27% since January of 2020. It would seem time for a steep slowdown. But that’s not happening.
For the week ended Feb. 11, the rate lock purchase volumes were just a hair off the gigantic numbers posted the same week last year, and roughly 26% higher than the levels of the strong, pre-COVID market in mid-February of 2020. According to Ed Pinto, the Housing Center’s director and the best forecaster in the field, the contract numbers show that prices for the week of Feb. 11, for homes that will close in six to eight weeks, rose around 15%. That’s a clear window into what’s coming. The rate lock purchase numbers lead Pinto to predict that prices, reflected in final closings, will continue rising in the mid-teens through March, and probably beyond. For the full year, he posits average gains of at least 12%. If that forecast is correct, the market could exit 2022 still advancing at 7% to 8%. “We already have three months of strong increases in the bag,” says Pinto. “We just don’t see any end in sight.”
Why much higher-than-average appreciation can keep going
To be sure, housing won’t come close to repeating its spectacular performance over the past two years. But gains of 12% would be more than double the average of the past few decades. What are the balmy conditions that keep house prices on a strong trajectory? Pinto points to three factors.
- The first is relatively low interest rates––and it’s the most important. A sharp spike from here could throttle increases in a hurry. But so far, the recent jump hasn’t had even a noticeable impact. On Feb. 11, the 30-year mortgage rate stood at 4.125%. That’s up by over a point in the past year, yet sales volumes barely budged, and rate lock purchase prices stayed exceptionally strong. By historical standards, mortgage rates and monthly payments are so modest by past standards that they’re still a tailwind. Pinto’s prediction is based on a scenario where rates remain about where they are today. For Pinto, they would need to rise to 4.25% and more likely 4.5% to dent that 12% prediction for 2022. To lower appreciation back to the level of 4% to 5% that’s considered normal, he says, would require a rise in rates to 5% or above, around one point higher than today’s level.
- Second, the volume of “homes for sale” is incredibly tight. Inventory now stands at under 500,000 houses, compared with 1.1 million at this time in 2019. All the houses on the market, at the current selling rate, would sell out in one and a half months. Inventory will grow, but the increase will take time. Even in markets where obtaining approval to build is relatively fast, such as North Carolina and Texas, it takes many months for new homes to sprout. Baby boomers in their sixties and seventies, who used to move to retirement facilities or condos en masse, increasingly stay in their homes instead, limiting the number of existing homes for sale. That trend has been strengthened by COVID, which has cut the numbers leaving houses for nursing homes. “The people over 65 have an incredibly high ownership rate [and] increasingly want to age in place,” says Pinto. He adds that because we’re now heading into the spring buying season, the surge in buyers will continue to outstrip that slender supply of homes for sale. “There are just too many buyers chasing too few homes,” he says.
- Third, we’re witnessing what Pinto calls “the great arbitrage.” In the pandemic, many companies gave employees permission to work from anywhere. People in San Jose or San Francisco or New York’s Westchester County had to commute to urban office towers––and pay a king’s ransom for housing. Now, they can collect the same big salaries and work from Boise, Charlotte, or Jacksonville. “They can sell their house in the expensive coastal markets and buy a larger one in those inexpensive metros, and still bank cash,” says Pinto. “That trend is bidding up prices at the high end in places like Phoenix and Austin in a big way.“
The skunk in the garden could be a big spike in rates. But for now, it’s looking like double-digit increases will persist for months to come. The housing furies are still converging to power the top sellers’ market in decades.
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