Will the housing market in Orange County continue to grow in 2022? If so, how much more growth can be sustained before another housing market bubble bursts? How far will interest rates rise over the year and how will we deal with a historic shortage of housing stock? Any predictions on which way the housing market is heading this year depends on the answers to these questions. After considering those answers carefully, here are some of the predictions we have about the housing market in Orange County for 2022.

Going into 2022 Strong

As we reported last month, 2021 was a very healthy housing market for Orange County. The numbers for the housing market in the area showed growth in the fourth quarter as they have throughout the year. Homes commanded higher sales prices even as both the number of sales dipped a bit and the median days on the market increased slightly as well. 

The best news was for sellers who generated huge sales prices last year with many homes going for well over their asking prices. One reason for this sellers’ market was the shrinking housing inventory. Orange County is not alone in this. Many, if not most, areas of the country are experiencing a housing crunch. Supply chain issues are making new construction difficult and many would-be homebuyers are simply being priced out of the market. This is something that will continue to be a problem throughout 2022.

Another reason the housing market has been red hot is due to interest rates which have been kept very low throughout the pandemic. That will change this year as well. For the housing market to continue to surge, interest rates need to stay low and the housing stock needs to grow, but this doesn’t suggest a crash. In fact, if you can buy, now is the time.

No Crash in Sight

Worries about a crash in the market are understandable, but what happened in the 2008 crash came as a result of homeowners not being able to make their monthly mortgage payments due to creative financial packages such as interest-only payments. This led to over-leveraged buyers who could not sell their property and had to short sale or foreclose. Additionally, banks were then left with properties that they couldn’t sell and they took massive losses. This resulted in a loss for everyone. 

The current market is much different. Lenders got hurt so badly last time and are more regulated now, so they are not granting risky loans. If a homeowner is forced to foreclose in the current market they would be left with a marketable property. This would help the inventory issue we currently find ourselves in. 

How High Will Mortgage Rates Rise?

The Federal Reserve will raise interest rates this year. Of that, there is little doubt, but how much is the question. Some experts believe mortgage rates will rise to between 3.875 percent and 4.375 this year. The belief is that this will happen in two increments. This will likely raise home prices in Orange County by between four and six percent. Keep in mind that a one percent increase in the interest rate translates to an 11 percent increase in home prices. As a result, homes will be about 15 to 20 percent less affordable this year. 

This is another reason to act fast. If you’re planning on buying a home in 2022, sooner is better. For now, the market in Orange County remains hot despite the inflation and economic turmoil caused by the pandemic. It’s competitive for sure, and it is tightening, but for now, there are homes available for motivated buyers.

Low Inventory and High Buyer Demand

Real estate in the Orange County area continues to be affected by extremely low inventory and high buyer demand in the single-family residence market. With the feds indicating that they plan on raising rates each quarter to employ some inflationary control measures, I think we will see a slight decrease in buyer demand as higher interest rates usually means fewer buyers in the market. This will likely ease the market slightly, but we will still see values continue to rise this year. However, the condo market in Orange County will continue to be a much more buyer-friendly market with potential opportunities to get seller concessions such as buyer closing costs covered, home warranties, and buyer contingent offers accepted.

The Seller’s Market Continues

Many economists believe the housing shortage could last as long as 15 years as new construction catches up to the pressing demands on our growing population. As a result, the Orange County market will continue to be in demand with a short supply of homes in our metro area for the foreseeable future. This is great news for sellers yet a bit problematic for buyers. Even so, it’s still a great time to buy even though interest rates are on the rise and real estate appreciation will outpace rates which equates to a sound financial investment on all fronts! 

With more and more people working remotely, living in Orange County will continue to appeal to people who no longer have to worry about commuting into Los Angeles. That and the lower cost of living is a sound investment. First-time homebuyers may feel a bit more pinched as they lack the equity from a previously owned home. They need to continue to be patient and use their savings to close. The only recommendation I have for these clients is to try and get in as soon as you can. 

A Warning to Sellers

Carefully pricing a home is crucial to obtaining the best outcome regarding price and terms. Pricing at or slightly above the last comparable pending or closed sale will expose the home to the largest buyer pool. The auction that follows will have buyers competing against each other to achieve success. This results in sales prices above their asking prices, and in many cases, way above their asking prices. Stretching the initial asking price considerably above the comps may still result in achieving the ultimate goal in selling, however, it will be at the expense of not obtaining the highest and best price and terms.