As I look back on the year in real estate with an eye towards 2022, I am reminded of Georges Melies’ famous 1902 movie, A Trip To The Moon. Despite being 120 years old, the movie holds up because it was built on great story telling and imagination, the same fundamentals of film making today [Contact Tim Here]. I found this film an allegory for today’s real estate market because like Meilies’ masterpiece, our market feels a lot like a rocket to the moon, and like the film its longevity is built on solid fundamentals. The basic economic tenet of supply and demand states where we find greater demand for a good or service exceeding supply of that good or service, the value goes up. You can’t get more fundamental than that and this describes our market to a T.
The comment I hear most is that we are at the top of the market; that we’re in a bubble and the market is going to correct. The fear that the market will collapse is largely tied to our recent experience of the financial crisis when values surged and then cratered leading to the Great Recession. Let me be clear: the only thing we have in common with that market is the volume of sales. The last time we saw the volume of sales like we had in 2021, was 2005, right before the epic price rise that preceded the epic price collapse [Check what your home is worth here]. Where we are so different today is the fundamentals. According to data collected by the mortgage industry, low quality borrower applications surged in 2003 and loans originating with a sub 660 FICO scores peaked in Q1 2007. You can trace the industry’s careless approach to lending to George W. Bush and his American Dream Down Payment Act of 2003 wherein he stated his goal was to increase the percentage of Americans enjoying home ownership.While well intended, his plan created the environment where low quality borrowers artificially fueled demand which Wall Street was all too happy to oblige and in turn allowed property values to become artificially inflated. The rest of course is history.
In contrast, low FICO score borrowers make up a very small percentage of buyers today. In fact, we have never had the quality of borrowers as we have right now. What makes them highly qualified borrowers, is a great economy with rising incomes. Unemployment is near pre-pandemic levels, and we actually have 14% more job openings than have job seekers so there’s no recession in sight [Follow us on Facebook here]. We also have record low interest rates. Add to this a group of buyers, the Millennials, who are still in their home buying/household formation infancy and a tsunami of investors literally pouring an ocean of cash into the market as a result of skyrocketing rents. What you get as a result is unprecedented demand. This would be fine if the supply was keeping up, but it’s not. Instead, we are finding people staying in their homes longer than ever; seniors aging in place, builders unable to build enough to keep up and a ton of homeowners not selling because they don’t have a place to move. This combination of low inventory and too many buyers has created a supply/demand imbalance that is historic and it’s not going to change anytime soon.
What’s this mean for 2022? Like George Meilies’ movie, real estate prices are going to rocket to the moon and with strong fundamentals, don’t expect a correction until rates approach 5%.