10 housing questions Southern California must answer in 2022

Cash buying’s hot — 30% of IE sales, up 65%; 29% of LA-OC buying, up 64%.

By JONATHAN LANSNER | jlansner@scng.com | Orange County Register

PUBLISHED: December 30, 2021 at 8:42 a.m. | UPDATED: January 1, 2022 at 3:46 p.m.

Forecasting Southern California’s housing market in 2022 requires answers to puzzles nobody can solve.

The local real estate market surprised us all by surviving pandemic-ravaged 2020, and then getting searingly hot in a still-virus-jumbled 2021.

A new year starts with smiles from real estate winners — property owners and those making transactions happen. Meanwhile, the losers — tenants and unsuccessful house hunters — will be carefully pruning their household budgets as rents continue to rise.

Ponder pricing of the past year and you’ll wonder why “affordability” isn’t a more widely discussed issue.

Home buyers saw the median selling price of a Southern California residence grow by $93,500 in 12 months — or 16% — to a record $693,500 in November, DQNews says. Tenants watched monthly apartment rents on new leases rise 16% in a year to $2,130 in Los Angeles-Orange County while surging 21% to $2,030 in the Inland Empire, Apartment List says.

Now before you think there are magic beans in real estate, please note the pandemic economy has been inflating many things.

For example, the S&P 500 stock index is up 26% in 12 months. And your used car is worth 30% more than in late 2020, according to the Consumer Price Index.

Inflationary jumps like these create doubts about the durability of the economic rebound that’s helping to boost prices. With these grand mysteries in mind, I’m not sure how one can predict with any precision what 2022 might bring.

Be warned, forecasts by real estate’s so-called “experts” are usually done with an eye toward owners and salespeople. So if a “strong” year is projected for housing, that’s usually “bad news” for the wallets of people shopping for a place to call home.

To help you with your own real estate outlook, here are 10 housing riddles to be solved …

1. Where’s the pandemic going?

Any 2022 economic outlook is linked to the future of COVID-19.

Consider how the pandemic has changed demand for living spaces. Owners wanted more space. Renters didn’t want roommates.

If the pandemic intensifies, those housing trends could continue. If coronavirus becomes a bad memory, will housing needs return to pre-pandemic norms?

2. How’s the overall economy?

Housing’s future was once tied to “jobs, jobs, jobs” — so buyers could qualify for mortgages.

But cheap money, rapidly appreciating assets, Wall Street investors, and a wealthy slice of the population made cash the hot thing for buyers. Across the region, 30% of Inland Empire purchases in 2021 had no mortgage, up 65% in a year; and 29% of Los Angeles-Orange County buying was all-cash, up 64%, Attom says.

Some year soon, traditional house hunters will again drive the market. They’ll need good jobs to afford the region’s pricey housing — either as owners or landlords.

Most guesses at the overall economy suggest a solid but not spectacular 2022. Will modest growth keep housing expenses from smashing many household budgets?

3. Will bosses remain generous?

Having a job — or two — is often not enough in Southern California.

Yes, local workers have enjoyed some of the nation’s top pay raises of late, up 6.5% in the year ended in September, according to the Employment Cost Index.

That trend helps explain how many afford to buy a home or pay the rent. But wage hikes are also fueling the highest local inflation rate in two decades.

Is the economic future tied to employers’ generosity or desperation for talent?

4. How high do rates go?

House hunters started 2021 with the average 30-year mortgage rate at the historical 2.65% low — down from 4.5% when 2019 began. Rates finished 2021 at 3.11%.

Potential buyers already get 6% less for the same payment house payment due to the year’s rate hike off the record low. Yes, warnings of the end of cheap money have been wrong before, but 2022’s story will likely be a tale of “how high?”

Imagine a 4% mortgage rate a year from now. That’s still a good deal, historically speaking. But for house hunters, the mortgage amount would fall by another 10%.

Will such a loss of buying power alter the logic of real estate shoppers?

5. Who’ll be lending?

Lenders have to be in a lending mood for real estate to remain active.

Mortgages in the pandemic era have been said to be nowhere as crazy as the easy-money deals before the Great Recession. Rising rates will crimp lenders in several ways, especially the loss of lucrative refinancing activity.

How the industry reacts is a big unknown. Already, Southern California lenders have cut staffing by 5% in the past year while local jobs overall have grown 6%.

Do these bankers remain prudent or do they lower lending standards to keep the lights on?

6. Which way for rent?

The landlord industry in 2021 went from bemoaning a potential “disaster” from unpaid rent and eviction moratoriums to watching rent benchmarks soar.

Southern California’s economy added 400,000 jobs in the year ended in November. Those fresh paychecks got numerous folks out of double-up housing situations and filled empty apartments.

But new gigs and pay raises only go so far, making the recovery surge of renters a finite trend.

Will landlord price hikes nudge tenants back to a roommate or mom and dad or convince renters to become homeowners?

7. Will builders build?

You’d think builders would rush to create new housing to sell and rent.

But construction occurs only when it meets profit goals. Shortages for everything from labor to supplies to land trim profit margins and dull building enthusiasm.

New homes are a small slice of local homebuying – just 7.6% of all sales in 2021, and down from 8.5% in 2015-19.

Permits statewide to build rental units in 2021 ran 13% above 2020. But the year’s building pace was essentially unchanged from the five-year span before the pandemic.

Will fears of making too much new stuff keep homebuilding at a modest pace?

8. Who’s selling?

If 2022 was local homebuying’s busiest sales year since before the bubble days of the 2000s, that meant Southern California also had the most sellers since 2005.

But huge “supply” wasn’t found by most house hunters.

New “iBuyers” — large investors buying directly from the public — were busy. Realtor rules now allow “coming soon” preview promotions, often selling residences before they’re formally on the market. And what we’ll politely call “off-market” deals or “pocket listings” hide other properties from wider audiences.

Will the typical buyer get better transparency in 2022 and not be sold a “there’s nothing to buy” story? That’s highly unlikely.

9. How will buying change?

Dealing will be quicker for the foreseeable future.

The pandemic necessitated the creation of a more hands-off sales process, shortening the time it takes to close a deal.

Virtual house previews cut the number of physical home tours. Financing advances make “pre-qualification” swifter and more meaningful. Contactless transactions are quicker.

Don’t forget quick-acting players like those iBuyers who can make a sale nearly instant gratification.

Realtor data shows the time between a Southern California home listing to entering escrow was 11 days in November, up from nine days a year earlier but down from 26 in 2019.

Is swift selling an indicator of eager house hunters or a symbol that real estate has entered the modern transaction age?

10. Who’s investing?

It’s clear there’s a wave of investors buying local homes.

What’s unclear is how many people acquired a home to flip or rent.

Southern California investor purchases in 2021 ran 32% above the previous year to equal 1-in-7 of all sales, Redfin estimates. Big institutions were 6% of L.A.-O.C. sales and 8% of Inland Empire deals, Attom states. And roughly 6% of all local sales were flips — homes bought and sold in a year, Attom adds.

And those totals don’t include homebuyers who chose to keep their former home as an investment or other second-home purchases.

Let’s say that investors aren’t good or bad, but they are fickle. They also have plenty of places to park their cash outside of real estate.

How long do they stay?