This article digests the major developments in real estate that occurred during 2021 and offers a forecast for 2022 and beyond.
Government supports end
2021 was another long year for the economy, real estate and individuals. Following the Pandemic Year that defined 2020, 2021 continued the adjustments across all sectors to the pandemic’s lasting presence.
Accordingly, the government has gradually lifted the economic supports put in place in 2020. For individuals, the last stimulus payments sent to households were delivered in March 2021.
Each stimulus payment resulted in a substantial boost to personal savings. In early 2020, the personal savings rate reached a record 34% of disposable income. Following another brief boost from the March 2021 stimulus, savings have gradually decreased, at 7.3% as of October 2021, according to the Bureau of Economic Analysis (BEA). For reference, this 7.3% savings rate is in line with pre-pandemic levels.
Another way the government has allowed households to stand on their own has been the end of the foreclosure and eviction moratoriums in 2021.
At the national level, the U.S. Supreme Court struck down the eviction moratorium in August 2021. Here in California, the eviction moratorium lasted through September 30, 2021. Under the moratorium, landlords were prohibited from evicting tenants under COVID-19 related financial distress due to nonpayment of rent.
Going forward, residential landlords need to follow special notice rules when evicting tenants now through March 31, 2022. Learn more about how to evict tenants during the Rental Recovery Act window and download the necessary forms by visiting: How and when residential evictions will resume in California.
Meanwhile, the foreclosure moratorium ended on July 31, 2021. Under the moratorium, servicers were unable to initiate or process delinquent mortgages through the foreclosure process. Further, delinquent homeowners had the option to enroll in a COVID-19 forbearance program through September 30, 2021. Now, acceptance into a forbearance program is up to the discretion of each servicer.
Forbearance programs provide delinquent homeowners temporary protection from foreclosure. Roughly 1 million homeowners remain in a forbearance program nationwide, as of October 2021, representing 2.1% of mortgaged homeowners, according to the Mortgage Bankers Association (MBA). When in a program, the lender agrees to delay foreclosure while the homeowner is taking steps to bring the mortgage current.
While these government supports have wound down in 2021, for many households, the need for support is still present. Here in California, 1 million jobs are still missing from the pre-recession peak as of Q3 2021. Further, extended unemployment benefits ended in September 2021.
Without these extra supports, many homeowners will soon find themselves heading for a forced sale, an alternative to foreclosure made possible by the extreme levels of home equity achieved through the past 12 months of rapid home price increases.
Pandemic economics become endemic
One of the biggest stories of 2021 was historic levels of consumer price inflation.
The Consumer Price Index (CPI) measures consumer inflation through fluctuations in the price of goods and services. After floundering at the outset of the 2020 recession and pandemic, this index has jumped, at 6.8% above a year earlier as of November 2021, according to the Bureau of Labor Statistics (BLS). This is the highest annual inflation rate experienced since 1982. For reference, the Federal Reserve (Fed) target for inflation is just 2%.
At the same time, asset inflation has also surged. For housing, both prices and rents have increased rapidly in 2021. Here in California, annual home prices have increased on average 19% in the low tier to 22% in the high tier as of September 2021.
With the surge in prices, the Federal Reserve (the Fed) has had to quickly rethink their strategies to support the economy during these turbulent times. This has meant reining in their bond market purchases and setting the stage to increase their benchmark Federal Funds Rate in 2022.
The Fed recently announced they would end their support of the mortgage market more quickly than they had previously planned. As of their December meeting, the Fed plans to end their bond taper by March 2021. As the Fed eases off the gas, interest rates of all types will rise.
Mortgage interest rates have already begun to inch higher at the end of 2021. Expect these interest rate increases to continue in 2022, causing buyer purchasing power to fall and pulling down home prices.
For as long as the U.S. has kept track, California’s population has increased every year — until 2021’s release of population data showed an annual population decrease in 2019.
California’s population has decreased due to:
- younger generations waiting to have families, with the birth rate falling across California from 2010 to 2016;
- California’s aging population, resulting in higher death rates over the past year, according to the Centers for Disease Control (CDC);
- increasingly expensive housing, including the state’s infamous high rents and home prices; and
- slowing immigration, with the state’s international migration rates increasing only 6% in the past decade, down from 15% in the 2000s, and 37% in the 1990s, according to the Public Policy Institute of California.
While California’s booming industries and pleasant climate continue to attract individuals to the Golden State, these have been quickly outweighed by the high cost of living. These high costs have pushed many out of their homes, either to move in with relatives or roommates — or into homelessness.
California’s homelessness crisis continued to reach new levels in 2021. However, the California Comeback Plan was launched in May 2021 to provide:
- immediate housing to 65,000 people;
- long-term housing stability to 300,000 people;
- 46,000 new housing units; and
- money to clean up public spaces that typically serve as homeless encampments.
While these plans are crucial to address the immediate homelessness crisis, a longer-term fix will be found in providing enough housing to accommodate low- and moderate-income renters and homebuyers. While the California legislature continues to tackle this problem, we are still many years away from meeting that goal.
Legislative steps toward more affordable housing
Home sales come to a head
Low supply and high demand fueled by buyer fear-of-missing-out (FOMO) pushed home sales volume higher in 2021 than any other year since 2008. At the time of this writing, annual home sales volume is on track to end the year 20% above 2020, following years of flat-to-down sales.
Further, low interest rates have buoyed buyer purchasing power, enabling homebuyers to offer more and contribute to the significant home price increases that took place in 2021. Here in California, home prices continue to rise at an annual pace, but the pace of rise has leveled off heading into Q4 2021. Still, home prices remain at historic levels today.
The rapid pace of sales and home price increases was made more considerable by the record-low inventory levels experienced across the state. In many metros, it was common to see 20%+ fewer homes on the multiple listing service (MLS) than in 2020. California’s inventory decline was most severe in less expensive, inland areas like Riverside, though Los Angeles also saw a sharp decline in inventory during 2021.
Despite the volatility that characterized its home sales, 2021 saw a return to the normal annual sales cycle, peaking in June and falling into the slower winter months. 2020 was an anomaly, with the sales peak being delayed by pandemic interference. Now, while the pandemic continues to derail everyday plans, homebuyers are eager to move forward with their long-term homeownership goals.
Construction falls behind demand
After two years on consistent decline, residential construction finally began to turn around in mid-2021 — just in time to run into bottlenecks and delays caused by supply chain disruptions, building material shortages and labor shortages.
At the current pace of building permits, single family residential (SFR) construction starts are on track to end the year 12% above 2020. Multi-family starts are on track to end 2021 with a 6% annual increase.
A bump-up moment in California construction starts
Still, some new laws encouraging and smoothing the path for more construction were passed in 2021, including:
- SB 10, which authorizes local governments to zone any parcel for up to 10 units of residential density when the parcel is located in a transit-rich area, a jobs-rich area or an urban infill site;
- AB 345, which requires each local agency to allow an accessory dwelling unit (ADU)to be sold or conveyed separately from the primary residence to a qualified buyer; and
- AB 571, which prohibits a local government from imposing affordable housing impact fees on a housing development’s affordable units.
As builders seek to cash in on these and other recent legislative boosts, they are simultaneously watching the economy with caution. Significant job losses have made builders cautious, watchful for the inevitable fallout from the 2021 expirations of the foreclosure and eviction moratoriums, to put downward pressure on home prices and rents heading into 2022. Alongside high inflation and the scarcity of building materials, these factors combined will hold back residential construction starts from reaching their full potential for the next two-to-three years.
Industrial property demand by users and investors continues strong, driven by the continued consumer reliance on online purchases. Availability of industrial space has plummeted, causing lease and sales prices to rise. However, while industrial has soared in 2020-2021, retail and office continue their depressed activity of 2020.
Office and retail vacancies have remained high in 2021, as the shifting pandemic response has caused volatility from quarter-to-quarter. Watch for retail and office to continue their anemic recovery in 2022, as return to in-person plans are pushed off due to pandemic resurgences.
However, where the pandemic has exposed vulnerabilities for the commercial market, there is opportunity. Commercial to multi-family conversions and mixed-use developments are one way commercial property owners are capitalizing on high retail and office vacancies alongside the housing shortage. Watch for these conversions to take off in 2022-2023.
Decline meets optimism in SoCal commercial real estate markets
Changes for real estate licensees
With new laws passed in 2021, the year also brought some changes for real estate professionals.
Beginning in January 2023, thanks to the passage of SB 263, real estate licensees and license applicants will need to complete implicit bias training during their licensing courses and 45-hour renewal courses.
Also passed in 2021 was AB 948, which requires cultural competency and anti-bias training for real estate appraisers and makes it unlawful for appraisers to discriminate in their appraisals or in making their services available to members of protected groups.
New California law tackles bias in real estate appraisals
A forecast for 2022 and beyond
Despite the rapid home price and sales volume gains in 2021, the housing market remains on uneven footing. Housing won’t begin a reliable recovery until California recovers the historic job losses of 2020, just over one million of which are still missing as of September 2021. This stable recovery is not likely to even begin until around 2024.
Expect interest rates to continue to inch higher in 2022, putting downward pressure on home sales and prices. Higher interest rates will also cause refinances to be reduced significantly, putting a damper on mortgage lender profits.
Due to downward pressure from interest rates and the growing number of forced sales following the end of forbearance programs, home prices will level off and begin to fall by the end of 2022. Home prices have already begun to level off heading into 2022, and this activity is expected to accelerate. Expect prices to bottom heading into 2024, rebounding with the jobs’ recovery.
The speed of this recovery will be helped along by any additional government intervention in the form of government-sponsored job creation. Otherwise, the jobs recovery — and housing recovery — will stretch on, carried on the backs of private businesses.
A return to stability
As we look ahead to the years beyond 2022, California’s housing market remains in a state of turmoil. Our infamously high housing costs have made our state’s high quality of life dim in comparison for large segments of the population. Before our housing market and economy can find a state of equilibrium, we need to unwind the shortfalls that have brought us here. The biggest is insufficient construction, reined in by restrictive zoning and too much power in the hands of a small — but vocal — number of not-in-my-backyard (NIMBY) advocates.
Jobs will eventually return to 2019 percentages, and when they do over several years, homebuyers will return to buy at a stable level. But without a significant increase in construction, we will continue to face the situation that has now become the norm — insufficient supply, causing prices and mortgage needs to rise beyond the level of income held by most Californians. This has resulted in one of the lowest homeownership rates in the nation.
Absent further consumer and business stimulus, California’s economy will face a slowdown before the private sector has the fundamentals to employ the nearly one million individuals who are still jobless heading into 2022. Business and lender confidence is absent and needs a period of consistent recovery before a seamless switch can move us from a stimulus-supported consumer economy to a business- and lender-supported economy.
Wall Street and Main Street are still years apart from achieving a base for economic growth, let alone being up to taking over the economy as monetary and fiscal policies pull back. Bankruptcies have been deferred due to economic stimulus and consumer behavior, but will eventually rise. Still, high levels of home equity mean mortgage foreclosures are unlikely to rise significantly and will be nothing like the 2008-2011 mortgage financial crises due to our extremely low homeownership turnover and limited supply of property for sale.