Real Estate Market Update for May 2022

The current headlines about the state of the economy are leading many people to ask many questions about the economy. What can we expect when it comes to the economy? Do we have an impending recession? Is inflation out of control right now, and what can be done to combat that? On top of all these, there is also apprehension related to the ongoing war in Ukraine. 

Needless to say, there are a lot of uncertainties surrounding the economy, and these concerns affect the real estate market as well. 

What will we see as we move forward toward the rest of 2022? Also, what should we expect in the next five years? 

In this video, Ryan Haley of Atlantic Shores Sotheby’s International Realty tackles the facts on what is really going on in the real estate market, not just the local but also the national market. 

Interest Rates

What’s going on with interest rates?

Mortgage interest rates have increased quickly. The fact is that it was up by 1.5% just as we started the year. 

One rule to remember is that high inflation is the enemy of long-term interest rates. This means that as we are seeing high inflation, the Fed has to use the tools they have to try to combat high inflation. And the number 1 way to do that is to increase interest rates. That, in turn, affects the long-term mortgage rates. 

With that, we have seen a jump in interest rates relatively quickly. We started the year with around 3.1% to 3.25% interest rates, and now, we’re seeing rates that have bumped up to about 5%. For the second-home market here, we are seeing rates that are a bit higher than that. 

What does that mean?

One of the interesting things that happen—and this goes back all the way to 1990s—is that when interest rates rise at least 1%, we have seen home prices rise. In fact, the average increase in home prices has been 8% when interest rates go up by at least 1%. That’s considerably a huge increase in home values and appreciation. 

Locally, we’ve seen interest rates increase by 1.5% in 2022, and prices have already gone up by 15%. 

But how does this affect home sales?

There is an interesting dynamic going on. Typically, when prices go up, people either tend to decide to go ahead and make a purchase or they do the opposite and pull back as they consider affordability. It’s a yin-yang effect with some people going all in to make sure that they buy before rates even get higher, while others tend to pull back. 

Over the long term—going back to the 1990s as well—when interest rates shoot up, typically, that will slow the actual number of sales to some extent. And we’ve seen that. Our number of sales is down a bit in 2022, compared to years in the past. Some of that has to do with affordability. Some people just can’t afford what they wanted at one point. 

Opportunity for Buyers

Now, comes the opportunity in that. 

Demand is still extremely high, but the inventory is low. When there are fewer buyers in the market, there is less competition. So, if you are a buyer, and you were trying to buy about six or nine months ago, you could have faced multiple-offer situations and the competition was truly stiff. 

Right now, we’re still seeing tough competition. But while before, there were around six to 10 offers on a property, now, there could be two to three offers on a property. So, the chances of your offer getting accepted have increased and could increase some more as the year progresses. 

Market Projections

According to Freddie Mac, mortgage rates are likely to continue to move higher throughout the balance of 2022. Although, the pace of that rate is likely to moderate. 

One thing that happened with the Fed raising the federal funds rate by 0.5%, many of the mortgage companies have already baked in their increase in mortgage rates. 

Currently, we’re at just over 5% on a 30-year fixed mortgage, and that will probably continue to rise. It is not certain how high it will go this year, but many experts are expecting that it is going to moderate and will probably shake out in the 6% range as we come to the end of 2022.

Stock Market Effect

Because of the increase in interest rates, we’ve seen some interesting effects in the stock market. Many growth companies do not like the fact that interest rates have gone up so quickly. Thus, we have seen some downturns and volatility in the stock market. 

This, in effect, prompted many investors to diversify their assets and look for something more stable. This is particularly true in the higher end where we’re seeing a mass influx of cash buyers. These are people who have taken their money from the stock market and decided to diversify and put that money into real estate. 

So, in certain segments of the market, the competition became a bit stiffer because of the entry of cash investors who are difficult to compete with. 

The move of some investors to diversify is something very real and is something that you could consider for yourself as well. It may be a good time to take out that cash and put it into an asset that is tangible and real. 

Are We in a Real Estate Bubble?

Another question or concern that some people have is if we are in a real estate bubble. 

One of the things that we think of when we think of a bubble is the situation from 2007 to 2010, with the big bubble bursting in 2008. However, according to many experts, the market right now is different. 

The fundamentals of a bubble, such as that in 2008, are very much different from what we see right now. A lot of that has to do with lending standards. If you recall, back in 2004 up to 2006 when prices shoot up very quickly, we did not have a real supply-and-demand issue back then. In fact, in Ocean City, there was a new construction project on every corner. So, there was a lot of supply and there was much more inventory back then compared to today. 

The issue back then has to do with the lending standards. We need to look at the default risk. At present time, the risk of consumers going into default, resulting in possible foreclosure, is low, We have some of the lowest default risks going back to 1999, and that is because of improved lending standards. This is in part due to the changes in the guidelines followed by underwriters. 

Default Risks - Then and Now

There are two aspects involved here. There is product risk and borrower risk. From 2004 to 2006, we had a very high risk for both the product as well as the borrowers. 

When we talk of product risk, a perfect example would be interest-only loans or a negative amortization loan where you’re not really paying down the principal. As a result, the amount that you owe actually increases every month. The banks get paid, but the consumer is not getting any equity. The good news is that this practice is no longer in place right now. 

An example of borrower risk is lower credit score. Back in the day, you could purchase a property with lower or minimum credit scores compared to what is required today. Another aspect that contributed to the bubble is the no-income, no-documentation loans which became extremely popular during the peak of the market from 2004 to 2006. Essentially, borrowers weren’t required to provide documentation, and this resulted in high borrower risk. 

In 2020, the standards of both product risks and borrower risks became restrictive. As a borrower, you needed to be able to show all of your income, and they will have to verify your assets. In fact, a lot of our buyers say that it’s a rather invasive process. However, the reason that is in place is because of what happened in the past. 

Our lending standards have gotten more stringent. Thus, we are in a situation where the default risk is at its lowest since 1999. 

Higher Equity for Homeowners

Another piece that shows that we are not in a housing bubble or a crisis situation is the fact that homeowners have more equity in their homes right now than ever before. 

According to the deputy chief economist of First American, the national loan-to-value (LTV) in Q4 2021 was 30.8%. That’s the lowest LTV in over three decades in inflation-adjusted terms. 

Homeowners in the 4th quarter of 2021 had an average of $307,000 in equity in their homes, which is a historic high. And the simple fact is that homeowners are not going to walk away from $307,000 in average equity in their homes. Compare that to the period of 2004 to 2006 where prices were going up and then the crash happened in 2008, many of the homebuyers then were under water because of the low down payment, negative amortization risky loans. It was easy to understand why those homebuyers were not able to repay and found it easy to walk away from those loans because there was no equity. 

Today, there’s a lot of equity, so people are not going to walk away from it. There is still a supply shortage and high demand, so much so that those who are not at risk of default could sell their home and make a profit. 

In sum, it is a much different situation today compared to the bubble of 2008.

Where Are Home Prices Going?

This is a question that is often asked. As mentioned, with interest rates rising, prices are expected to go up as well. 

When we look across the board, the average of all forecasts, including those from Fannie Mae, Freddie Mac, Core Logic, and the Mortgage Bankers Association, the average estimated appreciation of home prices for 2022 is 9%. We see a high of 10.8% projection from Fannie Mae, while the Mortgage Bankers Association is projecting a 6% increase. 

Much of the reason for the increase is due to the supply-and-demand situation. 

Where Do We Go From Here? 5-Year Projections

How will the market fare in the next five years?

Experts are expecting home prices to rise by an average of 9%, but in 2023, we are expecting to see home price appreciation of around 4.74%. In 2024, we expect prices to go up 3.67%. In 2025, it would be 3.41% and then increase again to 3.57% in 2026. 

What do these figures mean for you?

Let’s say that you bought a $360,000 property in January 2022. The experts are predicting that the value of the home in 2027 would be $456,000. That’s an equity increase of just under $100,000. That is still a very strong outlook as we move forward. 

All these figures have been gathered from third-party experts, and you can use them to decide for yourself. 

Local Real Estate Market

Mostly, the numbers mentioned concern the national market as a whole. But how is the local market in Maryland and Delaware?

To get a better picture of the market, let’s look at the figures. In Worcester County, Maryland, we have 225 properties for sale as of today. In the last 30 days, we sold 235 properties. So, we are still less than one month’s supply county-wide. 

If we break it down specifically to Ocean City, we have 132 active homes or condos in the 10 miles of beach. In the last 30 days, we’ve sold 150 properties, so we have less than one month’s supply for Ocean City as well. 

The Ocean Pines numbers are quite fascinating. Keep in mind that we have 14,000 year-round residents in Ocean Pines. That number will increase to about 21,000 to 22,000 summertime residents. Currently, we have 23 homes for sale in that entire community, which is Maryland’s largest homeowners’ association. In the last 30 days, we’ve sold 41 houses. This gives us half a month’s supply in Ocean Pines currently. 

While there are external factors, the supply and demand situation is very real. As we continue to see the imbalance in the supply and demand, we can expect to see prices going up in the near term. 

Your Feedback

If you like the information just provided above, it would be great to know your comments and feedback. Let us know what you think of the marketplace and your local market. If you have other questions about the real estate market, please give us a call, and we'll be happy to discuss more with you.