Housing Market Can Look Forward to a More Boring 2022

(Bloomberg Opinion) -- After a year of soaring home prices and problems getting essential materials such as lumber, buyers and builders took a moment earlier this year to catch their breath  and reassess the state of the housing market.

That gave us a few months of declines in new home sales and building permits, rising inventories of existing homes, and an end to historically high prices in lumber.

Now the market is shifting again, hinting at a 2022 that might even be considered somewhat normal: steadier production and supply to meet solid demand for homes, but with more typical levels of price appreciation.

The renewed optimism comes as the effects of this year’s slowdown continue to churn through the market. Four homebuilding companies have recently reported that they missed their guidance for deliveries in the current quarter.

New home sales have fallen by 30% since January, with many builders simply running out of homes to sell in certain communities. Building permits fell by 15% between January and June, with the rising cost of materials such as lumber leading some builders to postpone their plans until prices stabilized. The National Association of Home Builders housing market index, a gauge of builder sentiment, hit a 12-month low in August.

While supply-chain problems and some inventory constraints are likely to persist into next year, both buyers and builders seemed to be getting more comfortable with the current environment. Mortgage applications to purchase a home, after slumping from January through July, have increased over the past two months, this week reaching their highest level since April.

Even if the market is somewhat cooler compared with early in the year, it's still historically strong — for instance, the percentage of homes on the market that have posted price reductions is still lower at this point in the year than any comparable period other than 2020. The aforementioned NAHB housing market index increased by a point this month — the first signs of stabilization in months — suggesting that either supply chain problems or buyer demand is at least not getting worse.

One reason buyer demand and pricing are holding up is that affordability remains pretty good — perhaps a surprise to onlookers wondering how that could be possible given the amount of home price appreciation that's occurred since the start of 2020. So here’s the math: over the past two years, average hourly earnings for workers have risen by about 10%. Meanwhile, average 30-year fixed mortgage rates have fallen by about 0.7%. That means that, for an average worker, buying power has increased by about 16%. 

This chart by George Pearkes of Bespoke Investment Group shows how, given rising incomes and declining mortgage rates, the ability to afford monthly payments on a mortgage remains strong, though rising prices do make down payments more challenging. Suddenly-surging rent prices also make buying a more attractive option compared with where the market was earlier in the year.

Homebuilders also believe — or perhaps hope — that they’re beginning to see signs of supply chains improving by the middle of 2022. In its earnings call this week, Lennar Corp., one of the largest U.S. homebuilders, said that it expects those problems to subside by the second quarter of 2022. And on the cost side, the company said that the decline in lumber prices should more than offset the rise in other costs by the middle of next year, providing the possibility of profit margin expansion even in a more normalized pricing environment.

There's perhaps a broader economic extrapolation to this outlook. The story of the U.S. economy this year is one of robust demand that crashed into a pandemic-scarred economy that didn't have the capacity available to meet the challenge. That led to rising prices, inventory shortages, supply chain problems and reduced growth expectations today compared with the start of the year.

But companies have now had months to diagnose problems, make adjustments and plan for next year, when the supply chain and production outlook looks brighter. As long as demand holds up — and household wealth and income levels suggest it should — the economy in 2022 should feel better and run more smoothly than it has for much of 2021.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist and the founder of Peachtree Creek Investments. He's been a contributor to the Atlantic and Business Insider and resides in Atlanta.

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