Happy New Year!
I would like to wish all of our South Bay readers a prosperous 2022. We are so excited to continue sharing free South Bay real estate information and are more inspired than ever for the start of the new year.
This year, I am making it a point to produce at least two podcast episodes a month and a monthly email summarizing our top blog posts / podcasts for easier contact interaction. We hope to bring more upgrades to other areas of the business and thanks to everyone who keeps following along.
Without further ado, let’s get to the annual “Fearless Predictions” for South Bay real estate.
Market Recap & Past Predictions
Our local markets had an incredible 2021.
In general, South Bay residential real estate price are up in the high teens which is simply incredible. There are plenty of submarkets up 20% and even 30% on the year.
When the 5th worst performing submarket price is up 12.2% (Redondo Beach’s Golden Hills), then it has been an amazing year.
In summary, these were November year-over-year appreciation numbers by zip code:
- Manhattan Beach (90266) – Up 15.4%
- Hermosa Beach (90254) – Up 12.2%
- South Redondo, some Hollywood Riviera (90277) – Up 15.7%
- North Redondo (90278) – Up 17.1%
- Palos Verdes (90274) – Up 22.9%
- Palos Verdes (90275) – Up 23.1%
When it comes to past predictions, please note that sometimes my predictions are right on the money and sometimes they are horribly wrong. I nailed most of my 2021 predictions as it was an easy set-up (thanks Coronavirus), while I missed most of my 2020 predictions thanks to a “black swan event” (thanks again, Coronavirus).
These fearless predictions are meant to give you investing ideas to further research, along with insights/thoughts from a professional to help you plan out your real estate goals. And, for the most part, they should also be fun.
This is not meant to be investment advice and every reader should seek personalized advice from their trusted professionals.
My 2022 Fearless Predictions
This is quick list of my 2022 fearless predictions.
- Another Incredibly Strong Year of Price Growth (double-digits again)
- Rising Interest Rates / Falling Affordability Fail to Materialize
- Millennials Drive Housing Boom (This Year & Beyond)
- Supply/Demand Imbalance Persists All Year
- Long-Term Bet: NFTs Become Preferred Contracts of Real Estate
Please scroll below to see a detailed write-up on each topic.
Another Incredibly Strong Year of Growth
The year of 2022 will look a lot like 2021 in terms of price growth.
I am predicting another strong year where our local markets see an incredible jump higher — more than 10%. Rarely have I been this bullish on a Fearless Prediction post but the set-up for price appreciation is a perfect storm this year.
An inventory squeeze of historic levels emerged late in 2021 and there has been no relief.
Combine historically low inventory, ultra-low interest rates, and statistically the largest buying cohort, Millennials, coming of age (more on this later in the blog), will allow for our South Bay markets to continue appreciating at a torrid pace.
Demand is greatly outpacing supply with sellers petrified that they will not find their next home, or even hope to afford another home, after their sale.
Please do not confuse “sales cooling” as I believe sales pace will almost certainly slow. Sales will cool not because of a softening market, but due to supply simply not being there. Fewer homes will sell amid unsatisfied demand which will push the breath-taking price increases again in 2022.
Thanks to a multitude of record sales in various submarkets in the final quarter of 2021, you can expect those new comps to contribute to keeping the market on fire through the first half, and many will be surprised how strong price growth is through the end of 2022.
It could get overdone in 2022, but that is 2023’s problem.
This year will be double-digit appreciation yet again.
Rising Interest Rates / Falling Affordability Fail to Materialize
Rising interest rates and falling affordability are going to be hot topics in 2022.
The fear, and rightly so, is that rising interest rates will eat away at affordability and cause a correction in the California housing market.
I have been made a fool in past Fearless Predictions trying to forecast the direction of interest rates. And, here is my attempt to look silly again.
In 2022, mortgage rates for home buyers will rise but at a muted pace which will not have a huge affect on affordability.
While The Fed eases monetary policy and raises rates, mortgage-backed securities will not face as much change and mortgage rates will remain stable with a gentle rise.
Wage inflation, Millennials coming of age, and more creative mortgage products (interest-only loans) will help to offset price growth and keep affordability numbers stable as well, even amidst another double-digit jump in prices.
Many readers know that I follow affordability numbers closely on the blog as it is one of the best indicators of future market ups and downs. I will continue to report on it for our readers each quarter.
And, even though the low affordability numbers are getting uncomfortable, all of us will be surprised how it holds steady in 2022.
Millennials Drive Short-Term & Long-Term Boom
This is a big theme for 2022 and beyond, but Millennials are primed to be a massive force in the housing market now and for years to come.
First and foremost, a 2021 NAR report shows that Millennials make up the largest share of buyers at 37% of the total market. In fact, their share is so large that NAR separates them into two categories, Young Millennials (14% share) and Old Millennials (23% share).
Old Millennials are classified as 31 to 40 years old and Young Millennials are classified as 22 to 30 years old.
According to data compiled by Fundstrat via Bloomberg, BEA, NAR, and the U.S. Census Bureau, the U.S. economy typically does well when large population demographics head into what they call “prime leverage age.”
This is an age where statistically people are growing their income and able to take on more leverage (debt) for growing needs.
Prime leverage age is considered between 30 and 48 years old.
Due to Millennials growing into these prime leverage years, Fundstrat sees the Millennial age group accelerating their income/leverage through 2026 and it will not decelerate until the 2030s.
This means car purchases, travel, stock market growth, and yes, a frenzied home buying cohort from a demographic earning more and willing to take on more leverage.
Think what baby boomers meant for minivans, housing and the stock market. Millennials will be that same economic force this year and potentially well into the 2030s. They will be the main driver in the frenzied housing market this year and likely for the next decade.
Supply/Demand Imbalance Persists All Year
South Bay home supply/demand imbalances that ended 2021 will continue to be a problem throughout 2022.
This is a HUGE problem that will favor sellers thanks to low supply and outsized demand.
The factors contributing to low supply are immense issues…
- Many sellers cannot afford their next home if they sell.
- The lack of land in the South Bay to add significant housing.
- Massive demand from Millennials forming families and beginning their “prime leverage years.”
I do not see any solutions for the above problems at scale to solve the incredibly low supply woes in our marketplace.
The only solution will be prices. For now, prices are not high enough to deter the massive demand for such little supply.
Long-Term Bet: NFTs Become Preferred Contracts of Real Estate
If you are not familiar with NFTs or Non-Fungible Tokens, then please do your homework on the upcoming technology.
For now, many NFTs are limited to electronic collectables, artwork, and tickets, many of which the collectable/artwork market seems to be in a bubble (just my very under researched opinion as I do not own any NFTs currently).
NFTs are essentially smart contracts that are housed on the blockchain.
They give ownership to a piece of art or entry to a special event based on a specific contract. These contracts, much like cryptocurrency, can be bought/sold/transferred to different parties and maintained on the blockchain as a digital ledger.
Artists can not only sell a piece of art as an NFT, but they can also install a royalty component where if the artwork is sold again, they can earn a royalty with each transaction. That is just one creative way to use an NFT.
I believe NFTs could be used in countless industries in the future, in fact, they could be the preferred method of contracts in the long-term.
As a result, NFTs will change how we conduct business in real estate. Contracts to purchase real estate in the future can, and likely will, be done in the form of an NFT and be verified on the blockchain.
If ownership can easily be verified on the blockchain, then it will potentially eliminate the need for title insurance or title records kept at the county recorders office. Developers could earn royalties on future sales of their developments or governments could be automatically paid transfer taxes when a sale is consummated.
There are too many creative ways to imagine how NFTs will impact real estate, but this is one of the most interesting new concepts and technologies that down the road will revolutionize real estate as we know it.
Conclusion
This year’s predictions are some of the most bullish I have ever made on prices. These are bold predictions.
While not every prediction will come true in 2022, I firmly believe that there are economic, demographic, and geographic tailwinds for the South Bay market in the years to come. Long term, it is going to be hard to go wrong owning real estate in our local market.
None of this comes without risk but rest assured that I will update you every week on the South Bay home market. You will be the first to know if/when the real estate winds are shifting or if affordability becomes a negative to the marketplace.
For now, it is off to the races once again in the South Bay.
Wishing you a wonderful start to the new year and I will see you next week.
Cheers.