2022 Economic Outlook: Take the Good With the Bad

Updated: Feb 24

Investors and move-up buyers will keep home sales humming, but inflation and other issues could be hurdles.


Key Takeaways:

  • Mortgage rate increases will hamper housing affordability in 2022. First-time buyers will need your expertise to get out from under annual rent increases.

  • Current homeowners may find themselves ‘mishoused' as a result of the pandemic and seek out new lifestyle choices.

  • Commercial real estate remains strong, though the office sector can expect rent concessions to continue in 2022. Tax incentives or extra government funding may be needed to repurpose underused office space.

“It was the best of times, it was the worst of times ... it was the spring of hope, it was the winter of despair.” Those are the words of Charles Dickens in A Tale of Two Cities as he described the times surrounding the monumental French Revolution.

In many ways, Dickens’ words are applicable to the way the COVID-19 pandemic—now in a new phase with the emergence of the omicron variant—has upended our daily lives. We’ve lost more than 800,000 Americans to the virus. The employment market is improving but not back to pre-pandemic levels. Many workers have quit their jobs, and there seem to be “help wanted” signs in windows on every street in America. Inflation is quietly stealing our purchasing power. Homelessness is highly visible in major cities. Contempt for differing viewpoints is running high.

The times right now feel like something of a revolution.

Yet, there is more wealth accumulation in the country than ever before. Despite some volatility, the stock market hit new highs last year, and home prices consistently increased. Americans’ total net worth rose by $31 trillion between the onset of the pandemic and the middle of 2021, the largest hike ever in an 18-month period.

“Investors may have looked to the past to find that real estate is a very good hedge against inflation.”


Strength in home sales

Housing Shines Bright

Home sales are at their best in 15 years. Once all the data are tallied up, more than 6 million existing homes and about 800,000 newly constructed homes will have been sold in 2021—the best performance since 2006. Sales in recent months have been a bit lower compared with the same period last year, when we experienced intense bidding wars. Still, 2021 will finish meaningfully higher than 2020, which was affected by the spring pandemic lockdown. The pandemic boosted housing demand as people sought larger homes in less crowded areas. But the magical power of low interest rates played a greater role, as it always does. Mortgage rates averaged 3.9% in 2019 but have hovered near 3% since the onset of the pandemic, helping to lower monthly mortgage payments. That interest rate drop represents about $150 per month in savings for buyers with a $300,000 loan, reducing the monthly payment from $1,415 to $1,265.

However, affordability conditions are changing. Home prices have increased by 25% since March 2020. The $300,000 loan now turns into $375,000. Even with low interest rates, the monthly mortgage payment shoots up to $1,581. The initial relief brought by lower interest rates is wiped out by higher prices, especially impacting first-time buyers. That’s why first-time buyers now account for less than 30% of home sales, down from 35% in the early months of the pandemic.

Current homeowners are faring much better, though, because they can use the proceeds from a home sale to buy their next property. In fact, homeowners nationwide have accumulated $5 trillion in equity during the pandemic, or around $67,000 for a typical owner. In the super expensive San Francisco market, the typical owner has seen a large, juicy gain of $300,000. For renters in the Bay Area, it has become nearly impossible to own when the median home price has gone up to $1.3 million. The homeownership rate could, therefore, decline unless more is done to increase housing supply.

Rising Rates, Inflation Pose Challenges

That is not the end of it. Mortgage rates are set to rise this year. The Federal Reserve has been in a quandary about which of two mandates it should focus on: full employment or manageable inflation. Four million fewer Americans are working compared to before the pandemic. The unemployment rate, though it’s back to normal levels, is a less important measure because those who are not searching for a job are not counted. So, the Fed should be accommodative to keep pushing the economy along. But the highest core inflation in 30 years is forcing the Fed to rethink its approach. Reducing the purchase of mortgage-backed securities and raising short-term interest rates are inevitable. The end result of these policy actions will be higher mortgage rates, around 3.7% by the end of this year. At that rate, a $375,000 loan will translate to a $1,726 monthly payment.

“A huge number of homeowners could be ‘mishoused’—living in the right property before the pandemic but not anymore.”

Those pondering when to become homeowners will face higher mortgage payments, putting them a step behind those who have already bought. People who purchased last year locked in an average fixed payment of $1,265, while their new next-door neighbor is paying much more. At least those new buyers, unlike renters, won’t face the prospect of annual hikes in their monthly payment.

Rents accelerated in the late months of 2021,

with government data showing a 5% annualized

gain. Private sector data of large apartment owners indicate an even faster rent growth. Rents will rise again this year and the following year, and on and on. That’s because housing shortages are plaguing the entire country. Aside from a few data anomalies associated with the pandemic-era eviction moratorium, current rental vacancy rates are essentially at a 40-year low. That’s on top of all-time low For Sale inventory.

The Fed’s inflation-fighting policies won’t contain rising costs immediately. Inflation will be with us throughout 2022. In addition to higher housing costs, meat prices have gone up by 12% as of November and gasoline prices by 50%. Perhaps, this is a hint to eat more veggies and fruits (which have risen in price by only 3%) and buy electric cars. Real estate professionals need to drive more than the general population and will not be happy about high energy prices.

Rising apartment rents have boosted multifamily property prices. This may be why more investors are buying single-family properties. Home purchases for reasons other than primary occupancy rose to 17% of all transactions in October. Moreover, some investors may have looked to the past to find that real estate is a very good hedge against inflation. In the 1970s, when inflation was high, consumer prices rose by 7.1% on average per year. Home prices outperformed consumer prices with an average 9.9% annual gain. In the 1980s, as the Fed jacked up interest rates in order to kill inflation, home sales plunged—but not home prices, because rents were rising. During that decade, consumer prices and home prices rose by 5.6% and 5.5%, respectively. In subsequent decades, it was the same story: Home price growth has roughly matched or slightly outperformed consumer price inflation.

The combined impact of investor purchases and repeat buyer transactions will buoy home sales in 2022, even with rising mortgage rates. Existing-home sales are expected to fall by only 2% after a nice 14% cumulative growth in the past two years. Home prices will not fall and, in fact, will rise by 4% nationally.

Commercial Rebound: What Happens to Offices?

Rising rents are also happening in commercial real estate. The industrial and warehouse sectors have been strong throughout the pandemic. Online shopping and shipping needs have boosted commercial demand, rents, property prices, and construction. The retail sector is also witnessing rent hikes, though that constitutes a recovery after measurable declines at the onset of the pandemic. Retail sales at brick-and-mortar shops have increased meaningfully from a year ago—by 14% at home furnishing stores, 16% at general merchandising stores, 26% at clothing shops, and 29% at food and beverage establishments, driven by growth in the suburbs and not in downtowns. The one commercial sector with a huge question

mark is the office market. City skylines are

beautifully laid out and symbolize strength and glamour—but the buildings sit mostly empty. Only around one-third to, at best, half of office buildings are being utilized, depending on the city. Office rents are mostly being paid, even if the spaces aren’t being used, because many companies are financially healthy. Nonetheless, there has been a slow, steady upward creep in office vacancy rates and a downward trend in lease rates.

It is unclear if the office market can truly bounce back to pre-pandemic conditions, even when the pandemic is officially over. Office workers have demonstrated the ability to work from home. It remains to be seen whether hybrid offices will precipitate a comeback in the office sector. Rent concessions will likely continue. Repurposing office space is also a possibility, though it may require tax incentives or extra government funding.

Remote Work Opens Housing Options

Only time will tell, but right now, we’re in the first inning of fully digesting the meaning of work-from-home flexibility. That means a huge number of homeowners could be “mishoused”—living in the right property before the pandemic but not anymore.

Now to Hawaii: It has the worst job performance among all 50 states, with state employment 12% below pre-pandemic levels. Travel—both domestic and, especially, international—is just not there. Local workers are hurting. Yet, Hawaii home prices are among the highest and fastest-rising in the country. Working from home can mean working from a vacation spot. How would the boss know, and why would the boss care? Home sales in vacation resort regions like Hawaii have been exceptionally strong throughout the pandemic. All the while, homeownership in Hawaii has fallen from 61% before the pandemic to 56.6% now. It’s one illustration of the best and the worst of times in the current age.






Lawrence Yun

Chief Economist and Senior Vice President of Research at the National Association of REALTORS® Yun oversees and is responsible for a wide range of research activity for the association including NAR’s Existing Home Sales statistics, Affordability Index, and Home Buyers and Sellers Profile Report. He regularly provides commentary on real estate market trends for its 1.3 million REALTOR® members.

Dr. Yun creates NAR’s forecasts and participates in many economic forecasting panels, among them the Blue Chip Council and the Wall Street Journal Forecasting Survey. He also participates in the Industrial Economists Discussion Group at the Joint Center for Housing Studies of Harvard University. He appears regularly on financial news outlets, is a frequent speaker at real estate conferences throughout the United States, and has testified before Congress. Dr. Yun has appeared as a guest on CSPAN’s Washington Journal and is a regular guest columnist on the Forbes website and The Hill, an “inside the beltway” publication on public affairs.

Dr. Yun received his undergraduate degree from Purdue University and earned his Ph.D. from the University of Maryland at College Park.

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