What we can learn from the 2022 real estate market

It’s been said that those who don’t learn from history are bound to repeat it. And that’s an axiom that applies as much to the housing market as it does to politics, sports, relationships and other areas of life.

Hence, it can be constructive to look back on 2022 and assess how real estate matters transpired, especially if you are in the market to purchase or sell a home in 2023, the pros agree.

“It’s important to look back at 2022 because, even though it’s well known that real estate is cyclical, last year threw some curveballs at us that are worth learning from,” says Kenon Chen, executive vice president of corporate strategy at Clear Capital.

Robert Taylor, the owner of The Real Estate Solutions Guy in Sacramento, says we learned that, when everyone is playing musical chairs with real estate, things are great until the music stops.

“When the music stops, everything changes quickly. It happened in the late 1970s during the Carter administration when the Federal Reserve raised the Federal Funds rate to 15%. Demand for housing fell, and there was a rise in foreclosures,” he explains. “And it happened in 2022 when interest rates jumped significantly in the spring. Buyers faced with mortgage interest nearly doubling and housing prices already pushing the affordability ceiling eliminated many potential buyers from the market. And just like previous market cycles, it didn’t take years for it to happen — simply a few months.”

Even though the pandemic subsided in 2022, we also learned that a low continued housing supply matters.

“Lack of housing supply, after years of homebuilding pullback following the financial crisis, means that we still only have half the number of listings we had pre-pandemic. This is further exacerbated by the fact that most homeowners have a current mortgage rate that is half of what is available now — so they are staying in place,” Chen says.

Indeed, with fewer sellers willing to list their homes, inventory remains tight.

Al Lord, founder/CEO of Lexerd Capital Management, points to declining new construction activity in 2022, which is also partially responsible for the current continued low supply.

Chen notes that the lack of housing inventory significantly contributed to the sustained increase in home prices observed in 2022.

“We also now know that 2022 was the year the largest generation in history would reach prime homebuying and household formation age,” says Chen, referencing millennials.

Chen further points out that the massive transaction volume that occurred in 2020 through 2021 were really anomalies somewhat driven by Federal Reserve spending and incentives that put cash in people’s pockets while keeping rates low.

“In 2022, the record speed of rising rates and sustained home price appreciation definitely put the brakes on purchase demand while simultaneously making sellers think twice about listing their home if they are going to buy in the same area,” he adds.

Note that the explosive growth in home sales in 2021 was followed by a decline of almost 19% in 2022 — “a swing that has consequences on households and investment portfolios,” Lord adds.

Hopeful purchasers can learn from the mistakes made by others in 2022.

“First, don’t overbid on a home unless you don’t care if you lose money. If you truly believe you will never move again and don’t care how much you pay for the home, go ahead and overbid. On the other hand, if you know you might be moving in a few years, avoid overbidding,” Taylor suggests.

Additionally, never forget that most homes tend to sell in any kind of market.

“Days on the market may change, but most houses will still sell. If you are planning on selling your home in the next few months, expect a longer time on the market, but don’t get discouraged if you don’t have an accepted offer in two weeks,” Taylor adds.

Lastly, look for the best bang for your buck when shopping for a home.

“Look for value in relation to increased costs of maintaining the property, including costs of financing,” recommends Lord. “A property located in an area of excess demand can be a good bet.”