A Look Back at Early 2022 Housing and Mortgage Lending Trends

Earlier this year, Polunsky Beitel Green principal Marty Green penned a Law360 article on the key housing and mortgage lending trends to keep an eye on in 2022. Much has changed in the residential real estate market during the four months since – some expected, like significant interest rate hikes, and others more surprising, like the crisis in the Ukraine and its impact on the market. But one thing remains the same – it is still a seller’s market, with a significant shortage of new single-family homes throughout much of the country.

As Green predicted earlier this year, multiple interest rate hikes are challenging mortgage lenders, and he expects rates will continue to move at least somewhat higher before borrowers begin to see any relief. In mid-March, the Federal Reserve announced a quarter-point interest rate increase and in May, they announced an additional half-point increase. They also indicated that similarly sized rate hikes were on the table for the Open Market Committee’s June and July meetings. Green expects these increases to moderate price increases in residential real estate markets as home affordability continues to become a larger issue – both for buyers and for lenders who need to write mortgages.

When it comes to one of the more unexpected events of early 2022, the Russia/Ukraine conflict, Green notes that the market was forced to adjust on the fly.

“The mortgage market had already priced in the Fed’s increase and is anticipating further increases in the coming months,” said Green. “Although the uncertainty created by the crisis in the Ukraine initially moderated the impact of some of those anticipated rate increases as a flight to safety increased demand for US treasuries and mortgage bonds, concerns regarding the pace of the Fed’s anticipated rate increases to fight inflation quickly overcame the uncertainty about the situation in Ukraine, and interest rates have now increased over 200 basis points since the first of the year.”  

Other trends Green cited in early 2022 remain, such as the rise of renovation loan programs, given the housing shortage and rising interest rates that make new mortgages a pricier, more challenging proposition.

“Borrowers are facing the reality that skyrocketing home prices and rising interest rates mean their dream homes are currently not financially within reach. So, instead of buying, many are building, expanding, or remodeling their current homes,” Green said. “Lenders that can’t offer a robust renovation and construction product may be at a disadvantage in coming years, or at least until housing price equilibrium returns to the marketplace.”

Green was also prescient in foreseeing an increase in early retirements in residential real estate and mortgage professions due to the so-called “Great Resignation,” with many agents and loan officers retiring in their early fifties. His thoughts about more homes being built with multiple dedicated workspaces due to an increase in work-from-home options also prevail, as do his feelings about delaying a job change until after the closing of a mortgage loan to avoid complicating the underwriting process.

One trend in Green’s Law 360 article that has shifted significantly since early in the year is his expectation of a robust second-home market. The logic was that as people became more comfortable working from home, many with the means would purchase a second home in a more desirable location. But while demand for vacation homes surged during the pandemic, it has declined significantly over the last month due to rapidly rising borrowing rates and increased up-front loan fees. However, it is still up over 35% from pre-pandemic levels, and although demand has been dampened by the interest rate increases, the drop hasn’t yet been reflected in any appreciable reduction in prices of second homes in key areas.

“While the logic in our original prediction is sound and demand remains higher than pre-pandemic levels, the second-home market has cooled significantly due to a variety of unforeseen factors,” said Green. “It will be interesting to see if this slowing market will increase inventory levels, providing more (albeit expensive) options for potential homebuyers.”