How to Track the Real Estate Market: 4 Things Homebuyers Should Be Watching

Spring homebuying season is just around the corner (if it’s not already here), bringing a fresh wave of buyers and sellers into the housing market.

Here are four things happening in the housing market that homebuyers should be watching:

What's in this Article?

               Mortgage rates are drifting higher      
               

               Zillow ups its price forecast      
               

               Homebuilding pace slows      
               

               Investors increase their presence      
               

Mortgage rates are drifting higher

The average 30-year fixed mortgage rate jumped from 3.69% to 3.92% on the Freddie Mac Primary Mortgage Market Survey (PMMS), which surveys rates from around 80 lenders.

Rising mortgage rates are the symptom of inflation, which has been running hotter and longer than expected. To combat inflation, the Federal Reserve has indicated it will end its stimulus spending program in March and deploy its first interest rate increase.

Although the Fed does not set mortgage rates, its inflation-fighting policy influences them. It’s uncertain how steep and frequent the Fed’s rate hikes will be, and investor reaction to this uncertainty is pushing up mortgage rates.

The near-4% rate reported by Freddie Mac this week was the highest since May 2019 and is outpacing industry forecasts, including Freddie Mac’s prediction of 3.7% by the end of the year. The average of six forecasts from leading housing authorities is 3.83% by the end of 2022, with three of the six forecasters calling for 4% by the end of the year.

Although rates have already surpassed many forecasts, they may come back down. In fact, rapid rate spikes are often followed by a period of gradual cooling.

For homebuyers, mortgage rates are worth keeping an eye on because they directly affect monthly payments.

Zillow ups its price forecast

Zillow caused a stir this week by adjusting its home price growth forecast to feature 21.6% growth in May and 17.3% by January 2023.

That’s up from its previous forecast of 16.4% annual growth by the end of 2022.

The 21.6% appreciation forecasted for May would be the fastest year-over-year growth on record and nearly four times the average rate of 4.2%. It would also deal a significant blow to homebuyers already navigating limited inventory and rising mortgage rates.

However, Zillow’s forecast is somewhat of an outlier. Most housing authorities are forecasting annual growth in the single-digits by the end of 2022, with an average of 7.63% growth.

Zillow cited the extreme imbalance in supply and demand as a reason for accelerating its price growth forecast. It’s also notable that Zillow released this forecast before the weekly PMMS. Rising mortgage rates may soften demand and, by extension, home price growth.

Homebuilding pace slows

In addition to mortgage rates and home prices, inventory is another key thing for homebuyers to watch in 2022. According to Realtor.com, there were just 408,922 active listings in January – the lowest on record.

New construction is a fast-rising source of inventory that currently makes up around 33% of supply (another record). But this week’s Census Bureau residential construction report shows single-family home construction slowed in January, likely due to a combination of cold weather, COVID-19, and supply chain issues.

Single-family home starts fell 5.6% month-over-month to an annual rate of 1.116 million units per year. The rate of home completions fell by 7.3% to an annual rate of 927,000 per year, after finally reaching 1 million homes per year in December.

The silver lining is the rate of permit authorizations – a forward indicator of housing starts – unexpectedly climbed 6.8% to an annual rate of 1.128 million per year. That could be a signal that homebuilders will keep their foot on the gas and bring more inventory into the market later in the year.

Investors increase their presence in the single-family home market

One thing is clear: real estate investors are purchasing more homes than they were before. These investors range from mom-and-pop operations with a handful of properties to Wall Street firms buying entire developments in one swoop. However, the precise share of homes and whether it’s a record or not is up for debate.

Real estate brokerage Redfin reported this week that investors bought a record 18.4% of homes in the fourth quarter of 2021.

Investors bought 18.4% of the U.S. homes that were purchased in the fourth quarter, a record high. https://t.co/lcSNRwjg9i

— Taylor Marr (@tayloramarr) February 16, 2022

Data from John Burns Real Estate Consulting shows that investors made up 24% of the market in the third quarter of 2021, which was not a record since investors made up nearly 30% of the market in early 2010’s.

Here is what our data shows. Rising but nowhere near a record high. https://t.co/BjAN3KIyUL pic.twitter.com/zxSN1IAHvK

— John Burns (@johnburnsjbrec) February 16, 2022

For the average homebuyer, the precise numbers don’t really matter. However, the overall trend of investors buying and renting out single-family homes creates more competition in the market, especially for first-time homebuyers.

According to Redfin, single-family homes make up nearly 75% of investor real estate purchases and low-priced homes make up the largest share (although mid-priced homes are catching up). First-time buyers are likely targeting the same homes, but may be unable to compete with investors making all-cash offers.

Fortunately for some (and unfortunately for others), investor activity is very targeted and regional. Investors make up more than 30% of home purchases in some major markets and less than 10% in others.

Top 5 markets for investor share

MetroInvestor shareMedian price of investor purchasesAtlanta, GA32.7%$280,000Charlotte, NC32.1%$305,000Jacksonville, FL29.8%$265,000Las Vegas, NV29.2%$385,200Phoenix, AZ28.4%$404,000Data from Redfin.

Bottom 5 markets for investor share

MarketInvestor shareMedian price of investor purchasesProvidence, RI6.2%$269,950Washington, D.C.7.8%$425,000Warren, MI8.2%$115,000Virginia Beach, VA8.6%$170,350Montgomery County, PA8.6%$240,171Data from Redfin.

Homebuyers are in for a wild ride in 2022. But those that stick it out will be rewarded with a fixed monthly housing payment during a time of fast-rising rents, a relatively low mortgage rate (historically speaking), and an opportunity for fast and furious home equity.