Housing Market Update | Qtr. 1 2022

The Challenge for 2022: Housing Affordability

Historically, housing affordability has been quoted to be 3x your annual income (Home Price-to-Income Ratio).  Since the housing recovery started in 2011, this ratio has been a challenge to achieve. According to data tracked by Witch House, home prices have increased 7.6x faster than household incomes since 1965. This is increasing the gap between prices and incomes. Of course, in states like California and New York, this ratio has long ago not been feasible – the rate is north of 9x. However, in Southern Nevada, one of our attractions has been reasonable housing prices related to the median income. The following graph shows the Home Price-to-Income Ratio for the last 5 years in the Las Vegas area. A tipping point for concern for “Housing Affordability” is when the ratio exceeds 7. In the last 30 days, our median sales price for single-family homes has reached $470,000. Based upon the adjusted median household income for Southern Nevada, this places our April 2022 ratio above 7 for the single-family home market. The good news is we are around 4 for condos & townhomes.

The Census reported household income was $62,107 in 2019. There are other data collections that provide the 2020 figures and for 2021, we used the reported employer wage report indicating a 7% rise in wages year-over-year. The 7% initially sounds like a move in the right direct, however, home prices for the same period rose 20.5%. Wages in Southern Nevada would have to rise 18% to put the ratio back below 6. Even with the reported wage increases forthcoming, this is highly unlikely. We expect housing affordability for the single-family homebuyer to be a challenge for the next few years.

The Rental Market

Looking at the data above, you may conclude that renting would be the better option. However, rental rates have skyrocketed up to 22% in the last year. The median lease rate in 1^st qtr. of 2022 was $1,950. The graph below depicts median lease rates for the 1^st qtr. from 2017 to 2022. The median square footage for this timeframe has been relatively comparable ranging from 1,550-1,660 square feet. When you look throughout the Valley, you may see lots of multi-family complexes under construction. However, majority of these units are considered “luxury” apartments and will be leased north of $1,500 with many looking to achieve lease rates over $2,000.

Housing Snapshot | March 2022

Before jumping all the way into the future, let’s review a snapshot of where we are for the first quarter of 2022:

Inflation & Home Prices

Unless you’ve been hiding out, everyone has experienced the high inflation in all aspects of our daily lives since 2021. So, many are not surprised that we have seen housing inflation in double digits, but most economists’ projections weren’t even close, their highest estimate was 12%. Year-over-year, we are 26% higher for single-family homes and 39.2% for condos & townhomes. Year-to-date as of March 31, 2022, single-family homes are up 8% and condos & townhomes are up 10%. April is currently on pace for median home price to be $470,000 for single-family homes. What’s critical in April is that this was the first wave of closings with a 1% jump in mortgage rates, further adding to the affordability concern.

Are Cash Buyers Really Taking Over?

In the marketplace, we hear a lot of “noise” of the cash buyers running up sales prices. We ran data for 1^st quarter 2022 and 1^st quarter 2021 as a comparison to see what type buyers are purchasing with. The results are demonstrated on the grid below.  As you can see for these same two periods, the conventional loan buyer has made up majority of the buyers. Cash was second in both cases. What was interesting was the 10% drop in FHA loans. This was most likely due to two reasons: (1) Listing agents consider FHA loans to be less desirable for sellers (2) FHA rates were higher than conventional rates for most of the year. In 2022, the pricing index between FHA rates and conventional rates has narrowed, and in some weeks FHA has been lower. 

Interest Rates

The next big topic: interest rates. Current rates in Southern Nevada are generally above 5% for Conventional (non-Jumbo), FHA and VA. Rates have been fluctuating between 4.9% – 5.5%. One week jumped up to 5.75%. There seems to be a broad range of opinions as to where mortgage rates will go for the remainder of the year. The Federal Reserve has indicated they will most likely be more aggressive in their interest rate hikes to help curve inflation. This directly correlates to mortgage rates but indirectly impacts the 10-year treasury, which mortgage rates tend to trend with. Most banks/lenders expect rates to rise further in 2022 but the option range from flat to 75 basis points. Most expect rates to remain under 6%. Interest rates will not be the answer for our housing affordability concern.

The Graham Team’s Takeaway

So, what is the answer for a buyer’s ability to afford a home? While there’s no easy answer or quick fix, here is our advice:

1. Save longer: The ideal position of saving 2-3 years for your down payment may now take 5-6 years. Save those tax returns, bonuses and pay increases to a home savings account. Tough to do when gas and other essentials have also risen but if the “American Dream” of homeownership is important to you for building your net worth, then start a savings plan.
2. Many millennials are looking for gift support from family members to increase down payments.
3. Increase in income
4. Be flexible on size, location, and amenities. You may need to start with a smaller home than you planned on.

If you are looking for home prices to fall, there is no indication that supply is going to increase in the next couple of years. Supply and demand economics is what drives prices up or down. Homebuilders are substantially behind demand… building materials are expensive and in short supply. Sellers must have a replacement home to move into to open up some inventory. Nevada is expected to continue to grow in population, as the California migration but at a slower rate.

If I sell, where would I go?

Almost every seller is relocating to another home either in state or out-of-state. We have sellers who decided to “cash out” on the appreciation they have obtained to date. If this is an option you’re considering, make sure you are aware of the rental rates and low inventory. Unless you are just one of those very disciplined budgeters, many end up using the equity in their home sale (if they do not purchase within one year of selling). You may also have tax consequences if your gain is more than $500,000 for a married couple or $250,000 for a single (generally, gain is sales price – less purchase price – less your cost of sales = your gain). Home improvements may also be a further adjustment, check with your CPA before selling.

For Sellers who are looking to move up, relocate or downsize, there are some great options for you to move only one time, on your time frame, stress-free.

Many lenders, including two that we partner with, offer seller programs. (1) One of them allows a seller to purchase a replacement home as a cash buyer (giving you purchasing power over a contingent offer), then sell your existing home and move into your new home – only moving once. (2) The other option is an extended leaseback on your existing home. For cash buyers, this is an easier option to offer sellers. For buyers who have financing, a leaseback could be limited to 60 days. There are lots of options for sellers in today’s market.

What’s the Forecast for the remainder of 2022?

1. Sales Prices:  This a tough crystal ball to forecast. With record low inventory, you would expect normal supply and demand economics to predict further appreciation jumps. However, the affordability factor and rising interest rates could decrease demand as people simply cannot afford the new price point and need to save more money or wait for their income to rise.
2. Interest Rates:  We concur that barring further record-breaking inflation figures, interest rates will remain in the low-to-mid 5s, keeping under 6%.
3. Inventory:  This will remain low. We expect it to rise from the very low rate of 0.5 months/15 days to around 1 month by the end of the year. We also expect buyer demand to drop slightly.

Sell with our 10X My Home Program

Ask about our 10X My Home Program where we handle updating and remodel your home, including the upfront costs, which allows your home to in its best presentation and obtaining for your multiple offers to select from. Our program has put an average of $14,400 additional profit in our Sellers pockets. That’s no chump change!! 

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