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Redfin Predicts More Balanced Housing Market, Slower Price Growth In 2022

For those that have been frustrated by the one-sidedness of the real estate market in the past months, the Newy Year should bring you some peace. According to Redfin chief economist Daryl Fairweather, 2022 will see a more balanced housing market.

While Fairweather warned that it won’t entirely be a buyer’s market, there will be more selection and slower price growth. Stalled price growth is a particularly needed occurrence – since 1965, home prices have gone up 118%, while they jumped 25% from 2008 to 2021.

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So, how will prices slow in spite of the jumps they’ve taken in past decades? Fairweather explained that rests in the hands of mortgage rates, which he predicts will rise from 3% to 3.6% due to “pandemic subsiding and lingering inflation.”

“By winter, higher mortgage rates along with already high home prices will likely slow annual price growth down to around 3%, which represents a steep drop from the record 24% increase posted in May 2021.”

With higher mortgage rates, Fairweather said, first-time home buyers will have better chances at grabbing a property while other potential buyers could be discouraged. It would be a welcomed change for first-time buyers, who had tough sledding in 2021.

According to the National Association of Realtors, first-timers made up just one-quarter — or 26% — of the market in November. That mark was the lowest since Jan. 2014. NAR noted first-time buyers made up 33% of home sale buyers in 2020.

While home prices will slow, they won’t stop increasing entirely. Economists and industry leaders who participated in NAR’s Real Estate Forecast Summit predicted prices to rise 5.7%. NAR’s forecasts expect prices to rise, but while remaining under 5%.

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Fairweather made a number of other predictions for 2022, which includes rents raising by 7%. The economist sees several reasons why renting will be in higher demand, such as people choosing to live in cities where renting is common and more people moving to cities due to a strong labor market.

A 7% rental increase would be sizeable compared to previous years. In 2020, the median gross rent rose only 2.6%, while rental rates rose 31% of the past 10 years – an average of 3.1% per year. Redfin’s deputy chief economist explained that millennials will likely be forced to fall back on renting due to high affordability.

“Home prices will remain at record highs requiring hefty down payments at the same time rising mortgage rates will make home buying more expensive, so many potential first-time homebuyers will choose to keep renting.”

Fairweather also believes that politics will play a role in real estate movements, with people relocating to places where their beliefs are more accepted. While the feuds over mask mandates and vaccinations have made states much more diverse to live in, older political debates — such as abortion and pro-guns — while also influence homeowners.

A Redfin survey found that one in seven recent movers said they wouldn’t move to a state where abortion is fully legal. Home values also vary depending on a state’s alignment, giving an additional factor for movers to consider – 77%, or over $20 trillion, of the total U.S. residential real estate value lies in blue states, while red states account for just $7 trillion.

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According To Studies, Home Prices Are Rising Faster Than Incomes

For likely home buyers, depending on how much of a salary they bring in, they may have to wait a bit longer before landing that perfect house.

According to Real Estate Witch, from 2019 to 2021, the average house-price-to-income ratio increased from 4.7 to 5.4, a 14.9% jump and more than double the recommended ratio of 2.6 — which means houses now cost 5.4x what an average person brings in yearly.

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However, home prices rising faster than the average individual’s income isn’t suddenly a new trend. Since 1965, home prices have risen higher than the median income at a rate of 7.6x , and 3.1x faster since 2008. From 2008 to 2021, home values have increased by 25%.

Real Estate Witch also found that from 1965 onward, median home prices have gone from $171,942 to $374,900 — an 118% increase — while the median household income just barely rose up from $59,920 to $69,178, a 15% increase. Even worse, 2020 saw a 2.9% decrease in average income from $69,178 to $67,521, the first statistical decline in income since 2011.

In order to afford a home in today’s real estate landscape, homeowners need an average income of $144,192, which clocks in around $75,014 higher than the current average household income. CNBC notes that a general rule of thumb when buying a house is that the price should be no more than 30% of your gross monthly income – something that’s becoming increasingly difficult to do.

While this problem affects all classes and buyers, according to Bloomberg, those getting hit the hardest by the ever-increasing prices and overall lack of home flexibility are low-wage service workers and the blue-collar service class.

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There are a number of factors when it comes to the fluctuation of home prices. Local incomes play a big part, but so do shortages in supply and movements in mortgage rates. The economy, interest rates, and COVID-19 pandemic also affect median home prices.

According to real estate research firm CoreLogic’s chief economist, Frank Nothaft, the latest change in home price growth was one that hadn’t been seen by the company’s index in the four decades its been running.

“Annual home price growth was the most that we have ever seen in the 45-year history of the CoreLogic Home Price Index. This price gain has far exceeded income growth and eroded affordability.”

Most industry experts, meanwhile, believe that while the growth of home prices will slow, they won’t stop altogether or decrease. Fortune went over a number of real estate companies’ predictions, which see a home price growth of anywhere from 4% to 13.6% — or $389,896 to $425,886 — occurring in 2022. While the ranges of growth are clearly uncertain, the acceleration isn’t.

However, some other groups think the forecast may not all be cloudy. According to the Mortgage Bankers Association, the prices of homes should drop as 2022 progresses, although the first quarter will see the median price of existing homes possess a 15.3% year-over-year gain to $362,000. By the end of 2022, the forecast calls for a 2.5% decrease in year-over-year home prices.

While Fortune does admit MBA’s decreasing prediction is an outlier, the number can still give hope to home buyers that purchasing a new house could become easier in the next 12 months, if only just a little bit.