Is Real Estate a Wise Investment in 2022?
The pandemic-era housing boom has made real estate an enticing investment prospect for many people. Accountants, in their role as investment advisors and financial planners, are tasked with advising their clients whether to enter this market. Prudential concerns center on the sustainability of the housing boom and the risk of entering a market that may be at its peak. At the same time, there exists a real risk of missing out on an opportunity to generate significant cash flows and asset price appreciation. Balancing these concerns with an understanding of the economics of the housing boom is crucial to an accountant’s ability to give wise counsel to a client.
What is Driving the Housing Boom?
The residential real estate market is experiencing a sustained period of housing price inflation, the likes of which we had not seen since 2006. Median housing prices seem to smash records every month. In November 2021, the median sales price rose 13.3 percent, to $353,900, from the same period in 2020. Home prices are up in nearly every metropolitan area in the United States, and in most cases, prices have increased by percents in the double digits.
The housing boom started years ago in discrete pockets across the U.S., such as in parts of the Sun Belt and in states including Idaho, but over time, it has spread across the country. The boom has increased in part because of remote work, which allows a person to work from anywhere. This has led many people to move to less populated states or more suburban or even rural areas in search of more space and a better quality of life.
Driving the surge in prices is a decline in interest rates that began after the Great Recession. Buyers responded by taking out mortgages for new homes and, in many instances, these were bigger homes. The demand for larger homes has intensified during the pandemic, as people are looking for space that can accommodate home offices. When the numbers are tallied, housing prices in 2021 are likely to beat those from 2020.
According to The Wall Street Journal, in 2021, Americans borrowed more money to finance home purchases than at any point in history. Mortgage lenders issued a staggering $1.61 trillion in purchase loans, an increase from $1.48 trillion the previous year, beating the record of $1.51 trillion set in 2005.
Is the Housing Boom Sustainable?
As an accountant, you must consider whether these conditions are sustainable or whether we are heading toward another housing crisis like in 2008.
The most important factor lies with the Federal Reserve: with rising inflation, Fed Chairman Jerome Powell has signaled that the Fed will raise interest rates this year, which would increase the cost of borrowing and reduce the demand for housing.
Yet, there are question marks over the power of the Fed to drive down real interest rates. We tend to think of the interest rates in the 1990s as being the norm and rates in the 2000s and beyond as an aberration, but real interest rates have been in decline for a long time. Low inflation expectations, an aging population, greater economic stability and other factors are more important than Fed policy in determining real interest rates. This does not mean that real mortgage rates will not rise, but that the rise will be limited by these and other factors.
Another decisive factor is that the supply of homes is small. For instance, in November 2021, there was only 2.1 months’ worth of housing inventory, down 13.3 percent from November 2020. One reason that supply has remained so limited is that many homeowners simply decided to stay put as a result of the pandemic. This may change as the pandemic subsides, but many homeowners are aware that prices can go even higher, which motivates them to keep hold of their properties for longer.
With a global supply chain crisis, builders can hardly build quickly enough to meet demand. The result is very limited supply and a lot of demand. This won’t change any time soon.
What Should Accountants Advise Their Clients to Do?
As we have told our own clients and as the analysis above suggests, real estate is a worthwhile investment and will continue to be one in 2022. You should tell clients to throw their hat into the ring. They can do this directly and buy homes as investment assets, or they can buy shares in real estate investment trusts (REITs), which will give them exposure to real estate while retaining greater liquidity. REITs such as Annaly Capital Management, MFA Financial, AGNC Investment Corporation and Chimera Investment Corporation are all trading at attractive valuations and offer good dividend yields. Other investment structures can be pursued to gain exposure to the sector and reduce risk. What is important to note is that this boom has legs.