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54 | M REPORT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST DATA Record-Low Mortgage Rates Steer Housing Demand Along with a severe supply shortage, inflation reached its highest level in 40 years at the end of 2021. Could this pose risks for a housing bubble? M ore than 77% of homebuyers and sellers believe there's a housing price bubble in the area where they live, according to a survey in a new report from Redfin. Histori- cally rapid home-price growth has made homebuyers and sellers worried, although Redfin experts say rising mortgage rates and buy- ers who can afford their homes are preventing a bubble. A housing bubble is characterized by rapid, unsustainable growth in home prices that eventually "burst" when demand no longer supports high home values, followed by steep price declines. These instances are typically caused by an influx of demand from homebuyers and real estate investors. Meanwhile, 44% of real estate agents believe there's a housing bubble in the market where they work. "What we're going through right now is closer to a ripple in the water than a bubble," Redfin Chief Economist Daryl Fairweather said. "Mortgage rates are already going up, which will likely stabilize demand and reduce the risk of a bubble that could burst." The housing market has been extremely competitive as the coronavirus pandemic turned American society upside down in 2020, resulting in an increase in remote work and record-low mortgage rates that have steered strong homebuyer demand and a severe supply shortage. Median home prices grew by double dig- its all of 2021 as Americans were continuously moving to new parts of the country and new neighbor- hoods for affordability. "Homebuyers and sellers are rightfully concerned about how fast prices are rising, especially those who remember the housing market crash during the Great Recession," Fairweather said. "If this rate of price growth were to continue for another year, I would be worried about a bubble, too, but I predict home-price growth will slow significantly in 2022. Fairweather also mentioned that inflation, which reached its highest level in 40 years at the end of 2021, also poses the risk of a housing bubble. With the prices of goods and services significantly higher than they were last year, people have less disposable income to put into the housing market. The aver- age 30-year mortgage interest rates have risen roughly 0.5 percentage points since the beginning of 2022, landing at 3.56% in the week end- ing January 20, and are projected to continue increasing. "The housing market is much stronger than it was before and during the Great Recession," Fairweather said. "There's a very low likelihood that home prices will go down anytime soon." The pandemic-driven housing surge is much different from that of the mid-2000s, when lending criteria allowed many homebuy- ers to take out mortgages they couldn't afford. That resulted in millions of foreclosures and a sharp decline in home prices. Today's lending practices and servicers are much stricter, ensur- ing that buyers can afford their monthly payments with no hassle. Existing-Home Sales to Decline, Pending Home Sales Drop 3.8% Contract signings down nationwide, as all four major U.S. regions posted both month-over-month and year-over-year drops in contract activity. A ccording to the Na- tional Association of Realtors, pending home sales fell in December, indicating two straight months of declines. Existing-home sales are also expected to decline by 2.8% in 2022, and home prices are expected to increase by 5.1% due to the ongoing housing shortage. The Pending Home Sales Index (PHSI), a forward-looking indicator of home sales based on contract signings, fell 3.8% to 117.7 in December. Year over year, transactions decreased 6.9%. "Pending home sales faded toward the end of 2021, as a di- minished housing supply offered consumers very few options," NAR's Chief Economist Lawrence Yun said. "Mortgage rates have climbed steadily the last several weeks, which unfortunately will ultimately push aside marginal buyers." December pending home sales regional breakdown: • Month over month, the Northeast PHSI fell 1.2% to 98.2 in December, a 10.5% decline from a year ago. • In the Midwest, the index dropped 3.7% to 112.8 last month, down 1.2% from December 2020. • Pending home sales transactions in the South slid 1.8% to an in- dex of 145.2 in December, down 3.9% from December 2020. • The index in the West de- creased 10.0% in December to 95.0, down 16.2% from last year. As December slowed in transactions, Yun said that last year was an overall great period for housing in terms of sales and price appreciation and projects, and that the market may see a "minor reduction" in sales while mortgage rates continue to rise. He forecasts the 30-year fixed mortgage rate to jump to 3.9% by Q 4 and existing-home sales to drop by 2.8% to 5.95 million units. With December marking a third straight month of increased home construction, Yun expects housing inventory to continue im- proving and contribute to slower home price growth in 2022. He predicts that housing will begin to rise to 1.65 million units and home prices will increase 5.1%. "The combination of a more measured demand and rising supply will bring housing prices better in line with wage growth," Yun said. Realtor.com's Hottest Housing Markets data in December showed that out of the largest 40 U.S. metros, the most improved markets over the past year were Orlando-Kissimmee-Sanford, FL; Tampa-St. Petersburg, FL; Jacksonville, FL; Dallas-Fort Worth-Arlington, TX; and Denver-Aurora-Lakewood, CO. All four major U.S. regions reported both month-over-month and year-over-year drops in con- tract activity. Pending home sales transactions in the South slid 1.8% to an index of 145.2 in December, down 3.9% from December 2020. The index in the West decreased 10.0% in December to 95.0, down 16.2% from a year prior.