Real estate
July 6, 2022
4 mins

The US housing market: springing forward or pulling back?

July 6, 2022
4 mins
Jeffrey Arestivo
Head of Residential Real Estate Sales, North America
SUMMARY

Low mortgage interest rates in recent years have led to low housing inventory and record home prices. However, we expect more normalization by the end of 2022.


Spring is the season of hope and renewal. In the US residential real estate market, it is also traditionally the busiest period, when sellers expect the quickest results and buyers the most choice. In some ways, 2022 resembles any other year: well-manicured front lawns, pristine condos and upbeat realtor video walkthroughs. However, the mood in the market isn’t entirely one of primaveral optimism.

Among buyers, there is a palpable sense of fatigue. Many have suffered serial disappointments during the boom conditions of the past couple of years. More than one-fifth of transactions have sparked a bidding war, for example. With affordability declining fast – home prices jumped 18.8% nationwide in 2021,1 their biggest gain in 34 years – some purchasers have had to pare back their aspirations. And the initial excitement of house hunting can soon become a grind, with countless hours spent scouring Zillow and Realtor.com. 

Availability has been dismal. In January, the inventory of listed properties dropped to 1.8 months’ supply, its lowest on record. Admittedly, things are now improving somewhat. In May, inventory stood at 2.6 months’ supply.2 However, this is still far below a typical healthy level of 4 to 6 months’ supply.

While inventory may be rising, so too are mortgage rates. Since the end of 2021, the average rate on a 30-year mortgage has jumped from 3.11% to a May high of 5.25%. This represents the sharpest relative increase since records began in 1971. For many existing homeowners hoping to move, this raises the specter of exchanging a cheap current mortgage deal for a rather more expensive one. That said, those who are currently renting in big cities – where rents have been rising rapidly – might still find it cheaper to buy. 

The hike in rates is dampening overall US activity. Existing home sales fell for the third month in a row in April according to the National Association of Realtors. And the Mortgage Bankers Association (MBA) has reduced its annual projection of new mortgage origination by 35% to $2.5 trillion.

Admittedly, the effect of higher rates is far from uniform. In the short term, the average purchaser is much more impacted by more expensive mortgages. Over time, it might not be a bad thing if interest rates do not return to their lows, as such conditions have contributed to many of today’s affordability and supply constraints.

By contrast, ultra-high net worth individuals are unlikely to be deterred from purchasing altogether. In the super luxury space, homes sold for $50M +, sales continue to soar. Looking at results in 2022 year-to-date, if the pace continues for the remainder of the year, it will be the second-highest in history at 36 sales. 

Luxury US residential real estate markets on the west coast, such as Beverly Hills, Hollywood and Malibu, have seen no slowdown in activity. In the first quarter of 2022, the number of transactions involving homes worth $10 million and upward rose 28% year on year, and 108% for homes worth $20 million and more.3 Robust housing demand and scarce inventory were the main drivers, helping sellers keep prices at peak levels. With competition fierce, purchasers have frequently had to waive mortgage and inspection contingencies to secure their properties.

In New York City (NYC), European buyers seem likely to return in force following the worst of the pandemic. The Big Apple has long attracted overseas interest owing to its stability and resilience as a market, as well as diverse lifestyle appeal. As such, NYC real estate can act as a hedge against such risks as inflation.

In our view, homeowners nationally are currently seeing peak pricing, which will likely persist into the summer months. From September, we expect sellers will have to lower prices to sell their homes. The market may then stay flat through the end of the year.

By the second quarter of 2023, however, we think purchasers may come to accept higher mortgage rates. Amid lower pricing and increased inventories, transactions at every price level should increase. And that would be good for buyers and sellers alike.

For more information on residential real estate financing, please contact your Private Banker or Mortgage Specialist.

WE OFFER

Home financing

Whether you seek to acquire a new property, refinance an existing mortgage, or unlock liquidity from your real estate holdings, we can help meet your financing needs.

Find out more
Contact us

To help put you in touch with the right advisory or team, please answer the following questions.

1 S&P CoreLogic Case-Shiller US National Home Price Index

2 National Association of Realtors

3 Gibson, Mary. “Luxury Realtors Joyce Rey, Debra Johnston, and More Give a Q1 Update on Their Markets.” Haute Residence, May 6, 2022.