For Builders: Construction Costs Should Decrease
The majority of residential developers and homebuilders spent the first half of 2021 wringing their hands and wondering when the supply chain will resume normally. According to this source, “a significant factor in the low inventory in the new construction segment was the high cost of production.” There was (also) a problem with inflation, albeit a temporary one, harming the industrial industry. This has resulted in an increase in the cost of construction materials for homes and even automobiles. Lumber costs alone added almost $36,000 to the cost of new homes. In the 2022 real estate market, supply chain bottlenecks will be resolved as a result of ongoing economic expansion, and many businesses will refill their shelves.”
Finally, there was news in December that supply chain concerns are easing. “Port congestion in epic proportions is easing. Shipping costs are declining from record highs. Deliveries have sped up slightly. Businesses continue to face an alarming scarcity of truck drivers. Critical components, like as computer chips, continue to be in short supply. And the Omicron variety threatens to exacerbate supply chain constraints. Nonetheless, there is evidence that bottlenecks are unclogging.”
Everything Screams “Buy Now!” for Buyers
Pummeled by record-breaking property prices and bidding wars, many potential home buyers hunkered down and hoarded their money in 2021. They were waiting for the inevitable reorganization of the supply/demand equation. Even first-time buyers will undoubtedly pounce in the coming year, ready with larger incomes and stimulus resources in the bank. If both new and existing housing inventories increase, this could result in robust demand.
Many experts believe that by 2022, “these buyers will re-enter the market in droves.” While prices may remain elevated in 2022, they are unlikely to appreciate at the staggering rates seen in 2020 and 2021.”
Increased Mortgage Interest Rates May Suppress Demand
In December 2020, the mortgage interest rate was 2.66 percent; one year later, it is 2.75 percent. While this indicates minimal change year over year, home financial experts anticipate an increase in that rate in 2022, although it will remain lower than rates just a few years ago, which will decrease demand for new mortgages slightly.
The 30-year fixed mortgage rate will grow to 3.8 percent in the fourth quarter of 2022, according to Freddie Mac. As long as the price-inventory dilemma persists, this would have a stabilizing effect on price growth. According to Freddie Mac, home prices will increase to 4.4 percent in 2022, while new and existing home sales will reach 7.1 million in 2021 before declining to 6.7 million in 2022.”
This scarcity of land – or, more precisely, residential construction lots – will be a trend that homebuyers and builders will have to contend with in the coming year. According to a recent poll conducted by the National Association of Home Builders (NAHB), “76 percent of builders said that the overall availability of developed lots in their communities was limited to extremely limited.” This is an all-time high — by a significant margin — since the NAHB began collecting data in the 1990s. The previous high was 65%, set in 2018.
“In response to questions in the September 2021 NAHB/Wells Fargo Housing Market Index (HMI) survey, 46% of single-family builders described the availability of lots merely as low, while 30% described it as extremely low, for a total of 76 percent of builders reporting some form of supply difficulty.”
Homebuyers Will Be More Afraid of Making a Mistake When It Comes to Closing the Deal
Several of the variables mentioned above caused homebuyers to lose their bearings and go a bit insane. When homes are on the market for less than a week and the supply chain holds construction supplies, appliances, and even furniture on a boat someplace offshore, home purchasers become panicked and make poor decisions.
A Wall Street Journal story provides one example of this. “In such a fast-paced market, purchasers frequently ignore established precautions in order to commit to one of the largest purchases of their lives. Numerous buyers have sacrificed their right to terminate a contract due to a low appraisal or unfavorable inspection in order to increase their offers’ competitiveness in a bidding war.”
In 2022, as inventory increases, house buyers will spend more time weighing the pros and disadvantages of purchasing an older/existing property. Additionally, as a result of the flexibility afforded by working from home, some individuals will choose to abandon their previous urban residence in favor of a lower-cost, more peaceful smaller neighborhood.
Property Values Will Remain High… Or not?
Zillow, a highly recognized real estate brokerage business, was widely believed to be bullish on property values remaining high for the foreseeable future. According to this article, “Zillow’s market estimate indicates that house prices in the United States will have increased 11.8 percent by April 2022. Zillow Economic Research forecasts that yearly home value growth will reach 13.5 percent in mid-2021 and will reach 10.5 percent by the end of 2021. According to Zillow, sales volume will continue to rise in the coming year, hitting 6.9 million in 2021, the highest level since 2005.”
Recent developments cast doubt on the messenger’s wisdom – Zillow. As noted in this news source, “Real estate firm Zillow Group Inc. is abandoning the home-flipping market, stating Tuesday that its algorithmic strategy for fast buying and selling homes does not perform as expected.” The firm’s decision to discontinue its technology-enabled home-flipping business, dubbed ‘iBuying,’ comes on the heels of Zillow’s statement two weeks ago that it would suspend all new property acquisitions for the remainder of the year.”
If Zillow, despite its technical prowess and billions of dollars invested in residential properties, is unable to reliably forecast the future worth of homes, real estate brokers and their clients should tread carefully when seeking “expert” advise on projected property assessments.
With any luck, 2022 will be a fantastic year for homebuilders and purchasers. However, inflationary pressures, new COVID variations, or other market upheavals may alter everything. As is customary, caveat emptor. “Let the purchaser use caution.”
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