The past couple of years have been anything but ordinary for real estate investments. Last year, in response to the COVID-19 pandemic slowdown, the Federal Reserve slashed interest rates to record lows and mortgage rates followed. Many mortgage-finance companies felt the tailwinds from these low rates, and customers responded by refinancing their mortgages at a record pace.
Now, accelerating inflation has caused the Fed to shift course, which could have a sizable impact on real estate and mortgage-finance companies. Here are four trends in real estate that smart investors are keeping a close eye on going into 2022.
1. Mortgage rates will rise
Economists expect mortgage rates to rise as the Fed tightens monetary policy. The Fed has decided it needs to respond to rising inflation, which recently came in at a 6.8% annual rate in November, the highest since 1982. At the same time, the unemployment rate has dropped drastically -- down to 4.2% as of November.
Because of the recovery in jobs and accelerating inflation, the Fed has said it will taper its purchases of assets used to stimulate the economy sooner than it expected. Investors are also anticipating more rate increases than previously thought earlier in the year. Bank of America forecasts two rate hikes in 2022 and three more in 2023 and 2024.
These expected rate increases will boost mortgage rates as a result. According to Fannie Mae's Economic and Strategic Research Group, mortgage rates will average 3.3% in 2022, up from today's rate of 2.99%. Meanwhile, Mortgage Bankers Association (MBA) researchers expect interest rates to rise to 4% on 30-year fixed loans next year.
2. Origination volume will decline drastically
Mortgage lenders don't love rate hikes because they ultimately lead to a slump in business. When rates go down, people buy houses or refinance their current homes to lock in those low rates. That is what we saw play out last year and into 2021.
When rates begin moving higher, mortgage lending slows, which is what MBA is projecting for 2022. The MBA expects total loan originations to drop 33% next year from 2021, to $2.59 trillion. This decline will hit refinance originations the most, which the MBA projects will decline 62% to $860 billion.
This will undoubtedly hurt lenders in 2022. In an interview with CNBC, Marina Walsh, vice president of industry analysis at the MBA, said "many lenders will rely more heavily on their servicing business to achieve financial goals." As a result, lenders who had a boom in revenue and net income when interest rates dropped will likely see a slowdown next year. Lenders that could feel the pinch include Rocket Companies (RKT -1.70%), PennyMac Financial Services (PFSI -0.61%), and loanDepot (LDI -1.79%).
3. Demand for homes will outpace supply
Despite rising interest rates and declining mortgage origination, demand for housing should remain robust. According to researchers with Goldman Sachs, "of all the shortages afflicting the U.S. economy, the housing shortage might last the longest."
Current demand has reduced the supply of houses available to the lowest levels since the 1970s. Goldman says that a supply-demand imbalance will lead to a multiyear boom for homebuilding.
The firm expects states to deregulate land usage, which should help accelerate construction activity. It expects homebuilding to increase the housing supply by 1.65 million annually. When considering demolitions, net supply is forecast to increase by 1.4 million. The persistent demand-supply imbalance could prove favorable to homebuilder stocks such as D.R. Horton (DHI 0.43%) and PulteGroup (PHM 1.27%).
4. Home prices will continue to rise, but at a slower pace
From August 2020 to August 2021, home prices rose nearly 20% -- a record one-year increase. Experts expect robust demand to continue to drive prices up still more, although not at the same pace.
Goldman forecasts a price increase of 16% from October 2021 through December 2022. This is in the same ballpark as Zillow's prediction; the online real estate giant expects home prices to rise 13.6% from October 2021 through October 2022.
However, other researchers don't anticipate prices increasing quite as fast. Fannie Mae and Freddie Mac project home prices to increase about 8% and 7%, respectively. Meanwhile, the MBA is one of the few forecasting a decline, with prices falling 2.5% by the end of next year.