Mike Simonsen CEO of Altos Research | Inventory Predictions for the Upcoming Year

This week we talk with Mike Simonsen of Altos Research

There are a lot of misconceptions about the real estate market, Mike will help us sort it out a bit.

The Real Estate Market

The market has been on fire, it’s been a big year for home prices, but the real story for this year, and last, is the lack of available inventory. There are 350,000 single family homes on the market nationwide. Not long ago, like 5 years ago, there should have been a million homes on the market this time of year. This is a trend that has been falling over the past decade, but really dropped off at the beginning of the pandemic and has continued into this year. Both the supply side and the demand side are accelerated so anything that does come on the market is gobbled up quickly.

We have rates super low, locking in forever - 30 year mortgage rates. As a result if you find a house it’s going to be affordable forever, this drives a ton of demand. A small change in the interest rate makes a big change in monthly payment. So affordability is really impacted by mortgage rates, much more than it is in a change to the price of the house itself. At the beginning of the pandemic rates bottomed out and even with 10% price appreciation the affordability was up.

Looking forward to 2022, if rates stay the same and prices continue to increase we lose some affordability, if rates rise then we lose affordability, and we are likely to see a little bit of inventory build because demand weakens at some point. If rates fall, then what happens … ?

Seasonal Inventory

Inventory is definitely seasonal, peaking in late June and typically the 2nd week of January is the lowest inventory, it’s a very smooth cycle. What happened last year is people kept buying through the holidays so inventory never really peaked in 2020 and it just kept falling. This year the low point came in April and a little inventory climb in the summer, and now buyers are accelerating again. It looks like new record lows to start 2022 and really no sign of new inventory increasing.

Hidden Inventory?

With low rates it’s affordable to hold on to your house when you buy a new one, so now you have two houses at 3% … Now you have an investment property. This has taken 8 million houses off the market and turned them into investment properties, we lose about 10% of the inventory every year to investors. Most of these are individuals, something like 90% are owned by someone who owns one to four investment properties, so no sign of these flooding the market.

We had a mortgage forbearance process with some seven million people opting into the program at the start of the pandemic. At the time we wondered if people would have to sell or be foreclosed on. With the big increases in price everyone has equity and even if you can’t make your payment again you can sell and take your cash. As it turns out, almost all of the people in the programs have figured out a way to make their payments and keep their house, so none of these are going to increase inventory either.

Where Are The Bargains

If you are an investor waiting for bargains to come along, they are not coming. There aren’t going to be mass short sales because no one is short. For them to have a foreclosure you need to be in a bad mortgage situation, like a permanent loss of employment; and not be able to sell your house. People have equity, they have ultra low rates and homes are selling fast, so there is no foreclosure inventory coming. It’s a really good time to own right now.

Prediction for 2022

Number one - record low supply, number two - there will be fewer price reductions and demand will increase along with price. Tight supply and strong demand will continue through the first two quarters.