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Demand returns to urban markets in 2022

Demand returns to Urban markets in 2022
by Brad Cartier, posted in Newsletter

Despite the ongoing invasion of Ukraine, interest rates are set to rise in the coming months according to NPR. Federal Reserve Chair Jerome Powell is noted as saying that interest rates will likely rise a quarter percentage point this month to battle inflation. Powell is quoted as saying:

“The economics of these events are highly uncertain…So far, we’ve seen energy prices move up further and those increases will move through the economy and push up headline inflation, and also they’re going to weigh on spending.”

Flávia Furlan Nunes of Housing Wire reports that short-term interest rates dropped due to the geopolitical tensions in Europe. The average 30-year-fixed rate decreased from 3.89% to 3.76% last week. “Economists have said that the war in Ukraine could bring a short-term reduction in mortgage rates, as investors flock to safe haven assets like mortgage-backed securities and bonds.”

Despite short-term decreases, mortgage lending has dropped at a pace not seen in 3 years according to ATTOM Data Solutions. 3.27 million mortgages were originated in Q4 2021, down 11% from the previous quarter and 13% from Q4 2020.

Mortgage originations down - ATTOM

Source: ATTOM (March 2022)

“The decrease in all three mortgage categories during the fourth quarter, as well as the third straight drop in total lending, represented another sign that the near-tripling of lending activity from 2019 through 2021 has ended, at least temporarily. The latest numbers likely reflect several trends coming together at the same time. They include homeowner appetite for refinance loans finally getting satisfied and mortgage rates ticking upward. In addition, a tight supply of homes for sale throughout the Coronavirus pandemic has helped drive prices up but purchases down.”

Further, Diana Olick of CNBC reports that refinances are 56% lower than the same time last year. Mortgage applications overall were also 9% lower than the same time last year.

Urban markets

Following an exodus to less expensive markets with more space during the pandemic, it appears as though urban markets are making a comeback, albeit slowly. According to the National Association of Realtors (NAR), price appreciation is slowing with 67% of the larger metros achieving double-digit appreciation in Q4 2021, compared to 78% in Q3 2021. reports that “home prices grew at an unusually-fast February pace in many of the 50 largest metros, led by Las Vegas, Miami, and Tampa, with annual increases of at least 31% each.” Supply continues to impact the market, which is down 24% year-over-year, and down another 62% compared to 2020.

According to the National Association of Home Builders (NAHB), in Q4 2021 multifamily construction in non-metro counties had the highest growth rate of 91.2%, whereas large metro core and suburban counties had lower growth rates of 21.8%. That said, the trend is still upward.

Multifamily growth continues - NAHB

Source: NAHB (March 2022)

“In the wake of the public health crisis, there was a pronounced return to higher density markets or geographies, particularly in apartment and other multifamily residential construction…All the lower density geographies (small metro counties, micro counties, and rural areas) reached their lowest growth rates at the end of 2020, while large metro core, suburban and outlying counties reached their troughs in the fourth quarter of 2020, first quarter of 2021, and second quarter of 2021, respectively.”

Missing middle

Lower density multifamily, aka missing middle housing, continues to permeate the news as supply woes continue to plague the housing market. We need more densification with smaller 2-4 unit multifamily properties. According to a new survey from Zillow, “A majority of residents surveyed in Washington’s largest metro and suburban areas are concerned about rising housing costs and support allowing duplexes, triplexes and accessory dwelling units in residential neighborhoods.” 71% of respondents agreed that having more small and medium-sized apartments would improve affordability.

“Most residents agree: modest densification of residential neighborhoods could create more affordable housing and encourage alternative uses of transportation.”

According to a case study authored by Max Holleran of the Washington Post, when a city says no to densification they are putting upward pressure on housing prices and negatively impacting diversity and education.

States and municipalities are taking notice of the need for more modest densification, with New Hampshire discussing new legislation that would allow for the construction of up to 4 units in any lots already served by water and sewer.

According to NAHB, “the multifamily segment of the missing middle (apartments in 2 to 4 unit properties) has disappointed. For 2021, there were only 12,000 starts of such residences. This is flat from 2020, during a period of time when most market segments expanded.” Missing middle development currently on represents 2.5% of overall multifamily production, down from 11% between 2000-2010.

Missing middle construction lags - NAHB

Source: NAHB (Feb 2022)

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