Lopsided Supply Demand Curve Continues into 2022

Marked by record sales, historically low interest rates, rising prices and unquenchable buyer demand, 2021 proved to be another record breaking year for the real estate industry. According to the National Association of Realtors, existing home sales topped a 15-year high with an estimated 6 million closings nationwide. In New Jersey, more than 90,000 homes closed, a figure slightly higher than prior year sales (89,743 closings in 2020). In markets served by the New Jersey MLS (NJMLS), home sales saw a double digit growth (up 16.4% over 2020). Despite the record number of sales, pent-up buyer demand exacerbated by the pandemic continued to cause a lopsided supply demand curve tipping well in the favor of sellers.

For most of the year, homes in northern New Jersey sold in record time, averaging 45 days (a 21% drop from 2020) according to the NJMLS. Across the entire Garden State, days on market averaged only 36 days, with most homes selling well above asking price (average 101.8% of list price statewide) with multiple backup offers. Sellers benefited from the overwhelming demand that pushed average home sale prices up 14.4% statewide to $542,571. In counties north, the median home price saw a more moderate increase of 8.7% over the prior year to $500,000. As the prices skyrocketed, affordability plummeted, making the dream of home ownership virtually unattainable to many first time home buyers.

While the frantic pace marked the first three quarters of 2021, the last four months of the year experienced an obvious slowing. Some of the slowing was the result of normal real estate market seasonality (a phenomenon not seen during the height of the pandemic). Buyer fatigue began to set in as those desperate to purchase a home were shut out of not one but, in many cases, dozens of opportunities. Undeterred by the challenging market conditions, dedicated Terrie O’Connor Realtor associates employed creative and strategic negotiation tactics to win contracts. Still, severe lack of inventory had the greatest impact on the fourth quarter 2021 sales slowdown. Total new listings, as reported by the NJMLS, fell -23.2% in Q42021 vs the same time 2020, and total months of inventory dropped 34.8% to a meager 1.5 months of supply.

Outlook 2022

Experts agree that the tight inventory coupled with strong buyer demand should result in similar housing market trends for 2022, but at a more moderate pace. Those buyers unable to secure housing during the past two years of the pandemic will persist in 2022, but they’ll continue to be met with limited housing stock, increasing home prices and rising interest rates. A National Association of Realtors (NAR) survey of 20 real estate industry economists and housing experts suggests changing market conditions are expected for the new year. The Federal Reserve is expected to make two .25% interest rate hikes, housing prices are predicted to rise by 5.7% and inflation should rise by 4% (lower than 2021 rates of 5.7%). According to Lawrence Yun, Chief Economist of NAR, “We’ll see the housing market and broader economy normalize next year. Though forecasted to rise 4%, inflation will decelerate after hefty gains in 2021, while home price increases are also expected to ease with an annual appreciation of less than 6%. Slowing price growth will partly be the consequence of interest rate hikes by the Federal Reserve.”

While the market will remain positive, we anticipate slower growth with continued positive home appreciation. Affordability will continue to dip as interest rates rise. With every 1% increase in interest rates, affordability drops by 9-10%. For example, if a buyer is initially approved for a $500,000 home mortgage, when interest rates increase by 1%, their buying power drops by $45,000-$50,000 to $455,000-$450,000. First time home buyers with limited spending power will be most impacted by the rate hikes, and in many cases they’ll be pushed out of the market. Total buyer demand should see minimal slowing from the interest rate spike as there continues to be an estimated housing shortage of 3-4 million homes nationally.

Home builders face supply chain issues on everything from lumber to appliances. Building material prices have skyrocketed, but contractors are passing those costs on to buyers willing to pay. Despite the increased activity, developers are still unable to keep up with the overwhelming demand or come close to back-filling the massive holes left when new construction dried up post 2008 housing bust.

Despite inventory shortages, increasing interest rates, rising housing prices and moderately paced new construction, experts agree that the unwavering buyer demand should continue throughout the year. This should set the stage for another banner year for the real estate market locally and across the country. For sellers, the market continues to be in their favor, making 2022 the ideal time to list your property with Terrie O’Connor Realtors.