Summer Market Preview: 2022 Edition

Last year and in 2020 many homebuyers found themselves on easy street by virtue of sweeping mortgage rate reductions, multiple rounds of stimulus payments and the emergence of widespread remote work. The latter helped unleash a mass migration from cities to suburbs, as many buyers sought out larger living spaces with home offices, workout rooms and a backyard to call their own.

But things never stay the same for long—especially conditions in the housing market. In trying to be useful, we’re looking ahead at this summer’s market. We’ve deliberately stayed away from super-specific predictions and looked more at the lay of the land, the trends, the seasonal data that promotes customer savvy and builds homebuyer knowledge.

We want to give you a sense of what to expect as you assess your purchasing power and head out to open houses and begin meeting real estate agents and eventually loan officers.

In this Summer 2022 Market Preview, we’ll be focusing on several topics relevant to homebuyers including:

• Mortgage rates
• Inventory and new construction
• The end of COVID restrictions
• The effect of the war in Ukraine on U.S. housing markets
• Vacation homes

Mortgage rates: Inflation, uncertainties and your options

Over the last two years, homebuyers (and those homeowners refinancing) have been the fortunate recipients of historically low mortgage rates. And when we say historically low, we’re talking about the average 30-year fixed rate mortgage dipping as low as 2.68% in December 2020 and 2.84% as late as August 2021

And now? Well, let’s just say they’re returning to more familiar territory after dips not seen in decades.

As you may recall, the reason for this once-in-a-generation rate reduction was mostly due to the Federal Reserve taking decisive action in the face of the COVID-19 pandemic. Faced with acute economic anxiety and severe job loss, in March 2020 the Fed began dramatically lowering the Federal Funds Rate and vigorously purchasing mortgage-backed securities. Pretty soon, mortgage rates were at an all-time low and buyers couldn’t submit offers fast enough.

The current situation

While this combination of factors enabled a “golden era” of mortgage rates to briefly flourish, the current rate environment is not all bad news. Yes, interest rates have risen from where they were three months ago, six months ago and the lows of 2020 and 2021. But they remain at a reasonable level, historically speaking.

As spring turns into summer, there will doubtlessly be more fluctuations as the Fed further adjusts interest rates in an attempt to curb inflation, setting off predictable chain reactions in the housing sector. However, this in itself is not a reason to overreact or veer away from buying a home in the current marketplace.

Your creditworthiness is key

Your own financial well-being (especially credit score*) is just as important if not more important to buying a home than other commonly cited factors such as price and mortgage rates. Those things matter—no doubt. But having a solid financial foundation is also essential.

That’s why it’s important to not only work on your credit score to ensure pre-approval, but to also steadily build up ample savings to pay for your down payment.

Loan options: ARMs

You should always remember that you have choices when it comes to home loans. The current rate environment provides ample incentive to consider an adjustable rate mortgage (ARM) that will likely result in lower up-front rates. While the 30-year fixed rate mortgage remains the industry standard, this could be an opportune moment to think outside the box.

Bottom line: No one in the real estate or mortgage industry can sugarcoat inflation or magically move mortgage rates back below 3%—that bird has flown for now at least. But given the uncertainty of the economy, rates could realistically rise much higher over the next 6-12 months. If you’re seriously exploring a home purchase, do you want to take that gamble?For many months now, the U.S. housing market has suffered from a shortage of inventory, which in everyday terms means homes available for sale. This has led to a couple noticeable effects in the marketplace.

First, since supply has not kept pace with demand, competition for existing homes has increased measurably. The bidding wars that you may have heard about are a direct outgrowth of this. Sellers are in the driver’s seat and they’re getting the prices they want.

Secondly, while the gap between supply and demand has been a windfall to many sellers and homeowners (who've seen their valuations increase), it’s been more difficult for prospective homebuyers. One party’s gain is another party’s pain.

According to the National Association of Realtors, as of March 2022, the median existing home price for all housing types was $375,300—a 15.1% increase from the previous year.

So what does all this mean for homebuyers?

Basically, without a significant expansion of the nation’s housing supply, prices will likely continue to ascend, and some first-time homebuyers may be priced out entirely.

But this is not a doomsday scenario for potential homebuyers—far from it.

As you may have guessed, there are two ways to increase housing supply: Either existing homeowners decide to sell in greater numbers (thus increasing inventory) or new construction accelerates.

Over the past few months, housing experts have mentioned new housing starts as a way to relieve inventory woes and prices. Given the widely reported supply chain issues that have hampered the housing market over the past couple years, is this a realistic solution?

New construction: Help is on the way (and houses, too)

Construction starts jumped 22% year-over-year this past February, according to recent census data released in March. That brings the total available units to 1.7 million on a seasonally adjusted basis, which is the highest since June 2006. Perhaps most importantly, single-family housing starts, which account for the biggest share of homebuilding, increased 5.7%.

On the surface, these are all reasons to celebrate, especially if the momentum can continue into the summer months. However, any optimism around new construction has to be tempered by existing supply chain issues and also the soaring costs of housing materials. It’s not just lumber that’s become more expensive but also metal products, especially copper wire and structural steel.

Bottom line: Plenty of good deals still exist, but in this current climate you may have to exercise your full powers of due diligence to find a home that checks all the boxes. Prices can vary widely from one region to the next so it pays to look around. Talk to your real estate agent and lender and find out how your current financial situation impacts home affordability.

How does the lifting of COVID restrictions affect the market?

As of April 2022, most COVID-19 restrictions that were put in place over the previous two years have been either sharply reduced or lifted altogether. This has had implications for the housing market as well as the general economy.

With vaccinations at an all-time high and the presence of the virus greatly diminished, most Americans feel free to move around and talk to each other without fear of serious illness. This reinstatement of the status quo has helped the real estate sector reclaim a sense of normalcy. This summer, most buyers will be able to attend open houses without fear of illness and face-to-face interactions between broker, buyer and loan officer can resume to the benefit of all parties.

Impact of Ukraine invasion on real estate

The Russian-Ukrainian War has not only upended life in Ukraine and unleashed unfathomable human loss and destruction, but it has also shaken the world economy.

Global uncertainty

One unmistakable by-product of the war has been economic uncertainty. “A slowing economy, decades-high inflation, expired fiscal stimulus, tightening monetary policy, and now Russia’s invasion of Ukraine are all weighing on the health of the U.S. economy,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist.

Having only recently recovered from the economic disruptions brought on by the COVID-19 pandemic, the alarming price increases in oil and gas attributed to the Russian-Ukrainian War are poised to exert fresh pressure on supply chains and increase the costs of building materials (while also making them less available).

That last point is an important one. The scarcity of certain commodities puts additional pressure on housing starts. One example is petroleum, which is used as a critical building block in everything from asphalt to steel to glues to pipes and paints. Shortages and rising expenses can delay construction while adding to overall costs—costs that typically get passed on to the buyer.

Bottom line: The situation in Ukraine is fluid and once the conflict comes to an end the stress on global oil and gas supplies will begin to diminish. Will that happen this summer? No one really knows for sure. But when hostilities cease, we should see an uptick in consumer confidence, invigorated housing starts and a return to long-term stability in global markets.

Vacation homes: Is the thrill really gone?

Were you thinking of buying a second or vacation home this summer? If so, you may be in the minority.

As it stands right now, that trend—made possible by historically low mortgage rates—appears to be fading from the minds of affluent homebuyers. And not without good reason: The rapid rise in rates and the uptick in home prices are simply pricing out many potential buyers.

“The pandemic-driven surge in sales of vacation homes is coming to an end as mortgage rates rise at their fastest pace in history, causing some second-home buyers to back off,” said Redfin Deputy Chief Economist Taylor Marr.

While demand remains strong in the overall housing market in both cities and suburbs, vacation homes are a different beast. As an optional purchase, buying a vacation home is typically contingent on a favorable economic climate. Unfortunately, today’s economic environment has made vacation homes decidedly less appealing for many individuals.

This is especially true when factoring in the new fees announced by the Federal Housing Finance Agency. Beginning in April, up-front fees for second-home mortgages increased between 1% to 4%, depending on LTV (loan-to-value ratio).

Bottom line: While overall interest has cooled, your specific situation may be different. Depending on the local housing supply (and personal finances), there may still be ample opportunities to purchase a vacation home in summer 2022. Don’t let the pundits have the last word: Do your own regional research and see what the market has to offer.

Will this summer’s housing market lure you in?

So how do you feel about the summer 2022 housing market? Admittedly, times have changed (and rates, too) from the previous two years, but that doesn’t mean delaying your entry into homeownership is necessarily the best option. Remember, homeownership continues to make sound financial sense and is widely acknowledged as one of the best ways to build generational wealth. You may also be more than ready to trade that monthly rent for a monthly mortgage payment.

If you’ve prepared for this moment by enhancing your earnings, locking away savings and establishing a top credit score, you should be in a good place to explore a home purchase.