The real estate market in the United States has been decidedly unpredictable for the past couple of years. Many investors and industry analysts (myself included) thought that home prices would trend downward at the onset of the pandemic -- and the exact opposite happened.
Home prices spiked, with gains of more than 20% in 2021 alone. Mortgage rates have increased more sharply in 2022 than ever before. And there is a historically low number of homes currently for sale in the United States.
Having said all of that, here are three of my real estate market predictions for the last couple of months of 2022. Before we dive in, take all of these predictions with a big grain of salt. There are a lot of moving parts that affect things like home prices, mortgage rates, and investment valuations, so it's impossible to say with certainty what will happen.
1. Mortgage rates will start to moderate -- even with Fed rate hikes
Mortgage interest rates aren't directly tied to the Federal Reserve's benchmark interest rate hikes, but they tend to move in the same direction over time. In 2022, the federal funds rate has increased by 300 basis points (3%), and the 30-year mortgage rate has increased from roughly 3.2% to 7.1%.
However, keep in mind that this is also happening while employment and consumer spending are strong, and the economy isn't in a recession. If we hit a recession and mortgage demand really starts to plummet, it's entirely possible that interest rates can reverse course even if the Fed keeps raising rates.
Now, I don't think rates will plummet to anywhere near where they started the year, but if I were to make a prediction, I'd say that we'll end the year with the 30-year mortgage rate in the 6% to 6.5% range.
2. Home prices will stay elevated
Rising mortgage rates have certainly made homes less affordable, but housing supply is historically low as well. The inventory of existing homes for sale in the U.S. is roughly the same as it was at this time last year (when prices were spiking) and is roughly 30% below comparable 2019 levels (before the pandemic).
To be sure, home prices have declined a bit from the mid-2022 all-time highs, but they're still about 40% more than at the start of 2020. And as long as there are relatively few homes for sale, supply and demand dynamics will likely prevent prices from falling much.
3. Real estate will be the weakest stock market sector
The real estate sector has been a major underperformer this year. Through Oct. 28, the S&P 500 has declined by about 19% in 2022, while the Vanguard Real Estate ETF(NYSEMKT: VNQ) is down by 29%.
It's not that the underlying businesses are doing poorly. For the most part, real estate investment trusts, or REITs, are designed to remain profitable and predictable in any environment. But rising rate environments are generally a negative catalyst for income-focused stocks like REITs.
I'll spare you a long economics lesson, but the general idea is that when risk-free interest rates rise (like those offered by Treasuries), the yields of "riskier" investments like stocks tend to rise as well, which causes share prices to fall. Since investors are expecting the Fed to raise benchmark rates by another 75 basis points in November and by at least another 50 basis points in December, I wouldn't be surprised if the real estate sector has a weak finish to the year.
I don't have a crystal ball
Just to be clear, there's absolutely no guarantee these things will happen, and it's quite possible I'll be completely wrong about one or more of them. But one thing is for certain: This is one of the least predictable real estate markets of my lifetime. All I can do is consider the trends and overall economic climate. Invest accordingly.
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