There has been talk of a bubble burst or real estate crash in 2022 for some time now, however most people may not realize that it takes multiple things to happen in order to flip the real estate market upside down. 

The Real Estate Market has been extremely strong these past 2 years, with home values soaring like never before. So how did we get where we are today? And what will happen in 2022?

First, when COVID hit the Fed dropped interest rates in order to make it more affordable for businesses to build and expand, and in turn stimulate the economy. In doing so, mortgage rates also fell to an all-time low. This brought a surge of buyers to the market trying to capitalize on these rates.

At the same time that buyers were flooding the market, sellers were very apprehensive to list their homes for sale due to the uncertainty caused by the pandemic, causing record low inventory levels.

Our third factor in record home appreciation is with COVID halting production in many supply chains, then borders being shut down, once production began again TONS of ships were forced to wait offshore for weeks at a time before being able to off-load goods. 

Lastly, wage growth had an impact on builders being able to afford to hire the contractors needed in order to build the homes.

To top it all off, we have been experiencing the highest interest rates seen in over 40 years at 7.5%. This has forced the Fed to now begin raising interest rates in an attempt to alleviate some of the inflation pressure. In fact, interest rates have just hit 4% for the first time in 30 months, up from the record low 2.8% we had seen on a 30 year fixed mortgage. 

Keep in mind that when approved for a mortgage, the amount is calculated by what an affordable payment amount is deemed to be - NOT the overall price. To put this in perspective, one year ago being approved for a $2,000 monthly payment at 2.8% would get you roughly a $487K home. Today, that same payment at 4% interest you would only be able to afford a $419K home, which is a totally different type of property.

So with interest rates on the rise, home prices should start decreasing now, right? Not exactly.

History has shown us this is not necessarily the case, even though the Mortgage Bankers Association is predicting a 2.5% decrease. According to the Case Shiller Report, which is the gold standard on home values, values typically continue to rise even as interest rates increase. Additionally many people refinanced their homes while the lower rates were available, meaning less people will be selling, which keeps upward pressure on the inventory. Further, let’s review the scenario that someone buys a home and the value drops 15%. In today’s economy they can still afford the monthly payment and would not sell to take the loss. Typically, they would continue making payments, keeping even more properties off of the market.

Another component driving the market is rent costs skyrocketing. Here is Metro Detroit we have seen a 25% increase in rent prices over the past 2 years vs a 15% increase in home values. This has made owning a home more affordable to those who can qualify. Many people who chose not to purchase while rates were down are now scrambling to buy a home before rates increase further, putting more pressure on the market. 

My advice? For buyers, if you’re seeing crazy offers being made on homes, that’s because prices are continuing to rise. Not because of a bubble. Make the offer. For homeowners, lock in the lowest rate possible if you haven’t already and enjoy the benefits of ownership: building equity, tax write offs, appreciation, and owning your own home. For renters, if you aren’t in the market to buy a home, lock in your monthly rent cost for as long of a term as possible. Also, check nearby areas for price differences.

Whatever your plans are in your given situation, I advise you act quickly before rates continue to rise.

- Michael Perna