To come up with a proper 2022 housing market forecast, it’s important to first forecast where the 10-year bond yield is heading. The 10-year bond yield is the most important indicator for mortgage rates, not the Fed Funds rate. And mortgage rates, along with new household formation, job and income growth are the biggest factors for housing price growth.
I believe we are in a permanently low interest rate environment. Therefore, even with the Fed expected to raise the Fed Funds rate three times in 2022 by a magnitude of up to 0.75%, I still don’t believe the 10-year bond yield will breach 2%.
Instead, the yield curve will likely get flatter as the short end goes up and the long end barely moves higher, if at all. For 2022, I forecast the 10-year bond yield will hover between 1.5% – 1.85% for the vast majority of the time. As a result, I predict the average mortgage rate will only increase by 0.35% at most.
If you have a choice between believing the seven Board of Governors of the Federal Reserve System or the $46+ trillion U.S. bond market, go with the latter. The Board of Governors are nominated officials who make mistakes just as much as anyone.
They are sometimes too ahead of the curve or too behind the curve, which ultimately helps create boom and bust cycles. Part of the reason why inflation and risk assets are so elevated is that the Fed was too accommodating for too long.
Real Estate Background
To better understand where I’m coming from, here’s a brief background about my real estate interests.
I own four properties in San Francisco, one property in Lake Tahoe, have partial ownership of a property in Honolulu, and own 18 private real estate syndication deals through funds and individual investments mostly across the heartland. Real estate accounts for about 65% of our passive investment income.
I’m clearly biased towards real estate with tremendous skin in the game. But it is due to this skin in the game that I try to be as accurate as possible with my forecasting. I wish I was paid to make forecasts where whatever I say doesn’t impact our finances. But I’m not. A lot is at stake for our family and our livelihood.
Since 2009, I have also consistently taken action based on my beliefs. Pontificating is nice. But it is taking action based on your beliefs that will help you build and protect your wealth.
2022 Housing Market Forecast: Another Boom Year
I am 90% certain the U.S. housing market will show another positive year in 2022. The question is, by how much?
If we are talking about the median-priced home, which curiously ranges from about $360,000 – $400,000, depending on the source, I expect an 8% – 10% increase. This is down from an 17%-19% increase in 2021, also depending on the source.
In other words, by the end of 2022, the median-priced home in the U.S. will likely be somewhere around $390,000 – $440,000. This price range is still relatively affordable compared to an estimated 2022 median household income of roughly $73,000.
The reasons for another strong housing market in 2022 include:
1) Low and negative real mortgage rates.
As predicted above, mortgage rates won’t go up more than 0.375% in 2022 on average. In other words, your typical 3.125% 30-year fixed mortgage may go up to 3.5% in 2022 at most, which is still dirt cheap.
Even if inflation declines to 4% in 2022 from 7% in 2021, mortgage rates would still be negative. Therefore, there will still be a huge incentive to borrow as much money as responsibly possible to buy assets such as real estate.
2) A permanently higher demand curve.
The demand curve has shifted up. Therefore, demand is higher at all price points. The reason why the demand curve has shifted up is that there’s no going back to the way things were for millions of employees. Work from home and a hybrid work from home model are here to stay for good.
Further, the adoption of real estate as an investment is growing. No longer are people happy to just own their primary residence. Instead, people are now wanting to own multiple homes for passive income and profit.
Finally, the millennial generation is some ~72 million strong. This generation will be buying homes in droves for the next couple of decades.
Below is the classic supply and demand curve. Notice when the demand curve shifts up (D1 to D2), price also increases (P1 to P2). I believe the demand curve will continue to shift up as the adoption of real estate as a viable investment grows.
3) Increased demand from domestic institutional investors.
Given we are in a low-interest-rate environment, more capital will be chasing higher-yielding real estate. Further, there is growing access to institutional real estate funds for retail investors through real estate crowdfunding platforms and other private syndication platforms.
Investors now account for roughly a quarter of all resale and new transactions. In some areas, the percentage of transactions made up of institutional investors is up to 40%. I expect this percentage to grow, even if Zillow did blow themselves up due to bad pricing estimates.
4) Increased demand from foreign investors.
The biggest X factor nobody is talking about is what happens if foreign real estate demand comes back with a vengeance? Pre-pandemic, I witnessed foreign demand beat out many competitive home bidding situations here in San Francisco. Wealthy foreigners would simply buy homes and leave them empty for years to park cash. The disinterest on renting out their homes for income is a testament to how attractive U.S. assets are to foreigners.
The one good thing about the pandemic is that it has throttled foreign institutional demand since early 2020. By my calculations, there is roughly $200 billion of pent-up foreign demand for U.S. property. As borders slowly open up, I expect a tidal wave of capital to hit our shores.
5) A revaluation of U.S. property on the world stage.
Anybody who has ever researched overseas real estate markets knows how cheap U.S. real estate is for a developed country. The funny thing is, foreign investors know this, but we don’t. Most Americans don’t appreciate how good we’ve got it because most Americans have not lived overseas.
But I’m telling you as someone who grew up in six different countries, worked in international equities for 13 years, and traveled to over 60 countries so far, U.S. real estate is cheap.
A simple comparison to the Canadian housing market demonstrates the U.S. housing market has ~70% upside if valuations increase to similar levels. And the income upside in the U.S. is much greater.
8) Strong stock market gains.
Compare your 401(k) balance from January 1, 2019, to now. Now compare your taxable portfolios from three years ago to now. You are likely up well over 50% in such a short time frame. This is an anomaly.
Anybody who has invested through the 1997 Asian Crisis, the 2000 dotcom bubble, and the 2008-2009 Global Financial Crisis knows to always convert some of your funny money gains into real assets.
One of the best performing stock markets in the world since early 2020 has been the S&P 500. The reasons are due to strong corporate profits, quicker access to vaccines, more innovation, stable government, and a generous Federal Reserve. World investors see the performance of the U.S. stock market as an indicator for where to park money and provide a better life for their children.
9) Strong job and wage growth.
It’s an employee’s market, partially thanks to a high quit rate and strong government benefits. Millions of Americans have used the past two years to figure out what they really want to do. And the common consensus is that we all want better pay, better flexibility, and more perks.
In 2H2021, we saw the investment banks raise first-year analyst salaries from $85,000 to $100,000 – $110,000. This causes a cascade effect for the tech, management consulting, and other industries who also have to raise wages to compete for talent. But it is actually earners on the lower end of the wage scale who are seeing the highest increase in salaries.
Below is wage growth tracked by Goldman Sachs. Notice how U.S. wage growth is much stronger than Euro Area and Australia. U.S. wage growth is also the highest since 2007.
10) Rising building costs.
Unless there is no other choice, nobody will sell you a home at a price that is less than its cost to build. And building costs are going up.
Although inflation is expected to come down in 2022, supply chain disruptions will likely still persist for housing material. For example, lumber prices plummeted by 70% from their peak only to surge 80%+ higher out of the blue. Labor costs are also rising. As a result, the cost to build a house is increasing. Home builders will be forced to raise prices to protect their margins.
As someone who has spent the last two years remodeling a home, it is clear to me input costs are going up. Perhaps more importantly, the time it takes to build is also going up. As a result, my asking price, if I were to ever resell, will go up as well. Multiply my experience by thousands of homeowners who are experiencing the same difficulties.
11) Declining supply/inventory.
The combination of rising demand and declining supply will cause home prices to increase further. Take a look at the green line in the chart below. Existing home inventory is at its lowest level in 30 years. Further, the median ownership tenure has risen from about 4.5 years before the Global Financial Crisis to over 10 years today.
Homeowners are rationally not selling their homes. Why would they if prices are expected to continue to go up in a low-interest rate, high inflationary environment? The other major problem is having to buy in a strong market after selling a home. It’s easier to just hold if you can.
The Greatest Housing Market Opportunity: Big Cities On The Coasts
For the past two years, real estate in the Midwest and the South have strongly outperformed real estate on the more expensive coasts. I expect the outperformance to narrow and even flip in certain markets.
Housing markets that have gone up the most, but also have the most upcoming supply are most at risk of a slowdown. Housing markets that have gone up the least and also have the least upcoming supply are the most attractive. These housing markets tend to be in already built-out cities such as San Francisco, New York City, Seattle, and Boston.
As foreign investors come flooding back to the United States, I predict they will first buy up coastal city real estate. To them, coastal city real estate is already a bargain. Investors from Asia will buy up the west coast. Investors from Europe and Russia will buy up the east coast. Canadians will continue to buy everywhere. Central and South American investors will focus on the south and the coasts.
Although there will be continued migration to lower-cost areas of the country, the most hungry people will continue to migrate towards big cities. Big cities are where high-paying job opportunities are the greatest. Further, big cities are where you can network the most.
As people get on with their lives, the allure of big-city living will continue to be the most attractive option for the highly motivated. Once people make their money, they can then relocate to save money. However, oftentimes, the people who make their money end up making so much money they end up staying because the cost of living is no longer a problem.
2022 Housing Forecast Confidence Levels
When making forecasts, there are no guarantees. However, let me share with you my confidence levels at various price increases:
Negative appreciation: 10% confidence
Positive appreciation: 90% confidence
5%+ appreciation: 80% confidence
8%+ appreciation: 70% confidence
10%+ appreciation: 60% confidence
+15+%: 30% confidence
We could certainly see high teens price appreciation again in housing. This could happen if mortgage rates plummet by 30%+, foreign demand comes in higher than expected, favorable real estate tax laws are passed (e.g. raising SALT cap), and the stock market falters or explodes higher.
However, my base case housing market forecast for 2022 is another 8% – 10% price increase. Conversely, I only expect a ~5% increase in the S&P 500 in 2022. As a result, real estate will be one of the strongest asset classes in 2022. From a cash-on-cash return perspective, I’m not sure real estate can be beat.
If you are long real estate, then you should hold onto your properties to capture another great year of upside. As a renter, you should consider getting neutral real estate by owning your primary residence. Just make sure you see yourself living in it for at least five years. If you only own your primary residence, then you may want to surgically invest in more real estate online.
Thanks to just inflation, the house you find expensive today will probably seem reasonable three years from now. And in 10+ years, you will likely kick yourself for not buying it today.
How I Plan To Invest In Real Estate In 2022
Because I already leveraged up to buy a home in 2020, I cannot afford to buy another home without selling assets. My next home purchase will likely be five years from now in Honolulu if all goes according to plan.
However, given my positive outlook on the housing market, I will be investing money in single-family real estate funds and continuing to build my position in VNQ, the Vanguard real estate index ETF. I’m also going to look at individual real estate opportunities in the south.
Further, I find Redfin stock to be intriguing after a 55%+ sell-off from its peak in February 2021. It has a superior user interface and better price estimates. It didn’t go heavy into iBuying like Zillow, but Redfin’s stock has gotten almost equally as punished.
It is largely because I expect real estate to do well again in 2022 that I feel comfortable taking things down a notch. If my tenants move, I’ve got rent upside of 15%-25%. Further, distributions from several of my commercial real estate investments should increase in 2022.
The downside scenario for real estate is that mortgage rates shoot up by 1%+, a damaging new law is passed, and we enter into a recession. In such a scenario, the median U.S. real estate price might decline by up to 10%. But I only see a 10% chance of this happening.
If there is a 10% dip in real estate prices, I expect investors to aggressively buy the dip. I certainly will be!
Readers, what is your 2022 housing market forecast and why? I especially want to hear from people who are bearish on the housing market. Bearish viewpoints are especially helpful in highlighting things bullish people have not thought about before.
Art by Colleen Kong-Savage.