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Dearth of Inventory, Price Hikes Pose Challenges for Shoppers (January 2022 Market Report)

Published on: 02/17/2022

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Dearth of Inventory, Price Hikes Pose Challenges for Shoppers (January 2022 Market Report)

- Home value appreciation accelerated again in January, to a record 19.9% annual gain.

- Inventory plunged below 900,000 listings, a record low – down 42.4% from January 2020.

- Annual rent growth of 15.9% was down slightly from previous peaks, and monthly growth was essentially flat.

Buyers are likely to face another challenging home shopping season later this year, contending with record-low inventory and unprecedented price growth. But if early-bird buyers in the market in the early months of the year were deterred by rising mortgage rates and prices, their absence didn’t register: Home price appreciation accelerated again, likely thanks to the record-low number of listings on offer.

The Zillow Home Value Index (ZHVI) rose 1.5% in January from December, to $325,677, up 19.9% from January 2021. The annual growth rate represents an all-time high in data dating back more than 20 years – and the monthly pace continued its re-acceleration since November’s recent low of 1.2%. If monthly price growth were to hold steady at January’s pace, that would translate to an annual growth rate of 19%, or almost equal to the current year-over-year gain.

The midwinter market heat was widespread across local markets. Monthly home value growth accelerated from December to January in 38 of the nation’s 50 largest metropolitan areas. Among the nation’s 50 largest markets, the slowest monthly growth in December was in Milwaukee (0.7%), followed by New York (0.7%) and Washington, DC (0.7%). The fastest was in Nashville (2.5%), San Diego (2.5%) and Las Vegas (2.5%).

Inventory Plunges to Record Lows

After December’s bone-dry inventory drought, home shoppers may have been looking ahead to January for listings to be replenished. But home sellers evidently didn’t get the memo. Active inventory dropped 13% from January – the 2nd straight double-digit monthly drop and the biggest monthly decline in at least three years. That left active inventory 22% lower than a year ago, and 42.4% lower than January 2020 – the eve of the pandemic outbreak.

The proximate cause of the shortfall was a sharp cutback in the flow of new listings hitting the market, which slackened by 19% from December’s rate of new listings. That also puts January’s flow of new listings below its two-year comparison month’s rate, for the first time since July, when monthly price appreciation peaked. That suggests that market conditions are only getting harder for buyers, at least for the time being.

Inventory was down in January from December in at least 49 of the nation’s 50 largest metros (monthly data for Nashville is unavailable), and was down year-over-year in 47 of the 48 largest metros for which full data is available (January 2021 data for Milwaukee and Nashville is unavailable). The largest annual inventory declines in January among the largest 50 markets were in Miami (-49.9%), Sacramento (-38.1%), and Denver (-37.7%). Inventory was up year-over-year in Austin (+18.7%).

Similar to December, if there is one small silver lining for frenzied would-be homebuyers contending with rapid home value appreciation and limited inventory, it’s that the speed of the market has gradually slowed down since reaching a peak early last summer – and appears to have stabilized for now. In June, the typical U.S. home spent just one week on the market before going under agreement. That time frame rose to roughly 13 days in December and January. It’s worth noting that homes typically take longer to sell in the fall and winter months as back-to-school, shorter days and the holiday season all tend to eat into both buyers’ and sellers’ schedules. But while homes staying on the market less than two weeks before selling is still incredibly fast for midwinter, those extra few days may matter a lot to those buyers that need a little more time to assess their options.

Even so, the reality of the situation on the ground is hard to ignore. Home buyers today are making bids and closing deals despite some of the most challenging conditions ever: record-few homes for sale to choose from, priced at double-digit gains from last year, financed at sharply rising mortgage rates. It remains to be seen how long buyers can weather this storm, and how long homeowners will watch values rise before deciding to list. This month’s data tell us neither have blinked yet. Expect a sizzling hot spring shopping season.

Peak rent growth?

The Zillow Observed Rent Index rose 15.9% year-over-year in January, to $1,856/month. But monthly rent appreciation plunged to 0.1%, as rents quite nearly flatlined. That means renters who signed 12-month leases last winter are likely in for some sticker shock on their renewal offers, but anyone who’s been browsing rentals earlier in the winter won’t see much of an uptick compared to last month.

Rents grew year-over-year in all 50 of the nation’s largest metros. Among the 50 largest metros, annual rent appreciation was fastest across the Sunbelt, with the fastest growth in Miami (30.6%), Tampa (28.2%), Phoenix (25.6%) and Las Vegas (24.8%). Annual rent growth was slowest in Minneapolis (5.9%), Pittsburgh (7.8%) and Milwaukee (8.1%).

The rapid growth in rents is now being picked up, after a delay earlier this year, in official measures of inflation. The main Consumer Price Index component measuring rents, the Rent of Primary Residence, rose 3.8% year-over-year in January, or just over 0.5% month-over-month. Combined with rising Owners’ Equivalent Rent, which was up 0.4% in January , the rising shelter components of the CPI are contributing to overall inflation – now registering its fastest growth in almost 40 years.

Looking Ahead

Annual home value growth is projected to continue accelerating through the spring before peaking at 21.6% in May, before gradually slowing through January 2023. More than 6.2 million total existing homes are expected to sell in 2022.

Monthly home value growth is also expected to continue accelerating in coming months, rising to 1.7% in February and growing to 1.9% in April before slowing somewhat. By the end of January 2023, the typical U.S. home is expected to be worth more than $380,000. The robust long-term outlook is driven by our expectations for tight market conditions to persist, with demand for housing exceeding the supply of available homes.

The seasonally adjusted annual rate of existing home sales in January is expected to total more than 6.11 million, down 1.1% from December and 8.1% from January 2021 (January 2022 existing home sales data are scheduled to be released by the National Association of Realtors on Feb. 18, 2022). Existing sales volume (SAAR) is expected to grow throughout the spring home shopping season, before falling very slightly beginning in July. Overall, Zillow expects more than 6.2 million existing homes to sell in 2022, up 1.6% from an already strong 2021.

However, downside risks to our forecast remain. Rapidly rising mortgage rates present a major headwind to housing demand, particularly in more expensive markets.

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