After a year of record home-price growth, insanely low commercial property cap rates, and fierce competition in both residential and commercial markets, many wonder if the real estate market will crash in 2022. After all, record-breaking growth can't last forever -- at least that's what history tells us. But will 2022 be the year? Here's what the data is showing us.
Is hyper-expansion on the horizon?
Supply and demand is the largest driver for real estate prices. Low-interest rates brought buyers to the market in droves, but low supply drove home prices up at record levels. While there is definitely a real estate deficit in many markets, the data doesn't paint a clear picture of how bad the deficit really is.
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According to the latest census data, there is roughly a 6.5-month supply of homes on a national level, which is considered a balanced market. However, data from the National Association of Realtors (NAR) states there is a 2.1-month supply, which indicates an imbalance, a sellers' market. U.S. Census data on housing starts and permits for 2021 year to date shows housing starts are nearing 1.7 million housing units. Year to date through the third quarter of 2021, 190,000 rental units have been delivered according to CBRE Group, indicating that the gap between existing supply and the 2020 Freddie Mac-estimated shortage of 3.8 million housing units is quickly narrowing.
The final stage of the real estate market cycle is hyper-expansion, when building and deliveries exceed demand, causing a tipping point that is followed by a recession. If development continues at the level we are seeing today, or if other factors, such as increased property deliveries as a result of homeowners wanting to avoid foreclosure, happen simultaneously, we could see home prices slow or even turn in 2022 or just beyond.
Bye-bye buying power
Inflation and economic stability are concerns that impact real estate prices, particularly as the omicron variant makes a wave of new cases across the country. The employment rate for the nation is nearing pre-pandemic levels, currently at 4.2% according to the latest census data. However, inflation is the next big battle as Americans face the reality of significantly higher costs for goods and services.
The Fed has indicated its intention to increase interest rates in 2022 to combat today's high inflationary market, which will make it more expensive to borrow money to purchase things like real estate. If you also consider American purchasing power has decreased because of inflation, today's high real estate prices mean buying appetites will likely falter in 2022, another sign supply may be tipping in a new direction.
While there are certainly a number of factors that could push real estate over a breaking point in 2022 or beyond, it's unlikely any of these factors will result in an immediate and sudden market crash as we've seen in the past. Crashes in the real estate market aren't nearly as common as people may think. Aside from the Great Recession, real estate prices actually rose in the dot com bubble and the recession during 1990-1991. A notable economic event, such as a new fiscal policy, stock market crash, or uncapped inflation rates, could definitely result in a real estate market crash; however, there's no guarantee that would be the outcome.
It seems only time will tell what's in store for the market ahead. Investors and homeowners should not necessarily worry or try to time the market. If it comes, it's a great time to pick up real estate at a discount from today's high prices. Buying and holding property for the long term is the best way to avoid the ups and downs of market swings.
