Let’s start off by talking about big numbers. 2021 was quite a year for Central Iowa residential real estate. 19,673 homes were listed for sale. 17,923 home sellers accepted offers on those homes. As of December 31st, 17,494 home sales closed totaling over $4.8 billion dollars sales volume in the Des Moines and Central Iowa region. When you add the additional economic impact of real estate related industries like mortgage lending, appraisers, and inspectors, plus the retail purchases (think paint, carpet, flooring etc) by new homeowners, you can add an additional $1 billion dollars to the overall local economy. The real estate industry contributes over 14% of the state of Iowa’s total economic income.
The Cycle of Real Estate
Looking back at the previous two years, Central Iowa has experienced tremendous growth with much credit (or blame) going to Covid 19. Real estate tends to follow a ten-year cyclical pattern. There are four stages of this economic cycle. The period of growth, the peak, a downturn, and the bottom of the cycle. Our real estate market in Central Iowa was last at the bottom stage in 2010 after the mortgage industry induced economic recession of 2008. From 2009 until 2019, all indications were that 2020 would be the peak year, if not the full start of the downturn of the cycle.
Then Covid 19 happened. Iowans quickly discovered that their current home no longer met the new demands of working from home, schooling from home, or sheltering in place. Iowa’s Governor designated real estate as an essential industry and that literally opened the door for Realtors across our state to begin working with home buyers and sellers and with a new motivation, never seen before.
Fast forward to the end of 2021. Real estate sales have set the bar for new records in unit sales and home pricing, helped immensely by historic low mortgage interest rates. The question now is whether the local real estate market cycle has peaked or if we have yet another year of high-volume sales ahead of us. Time will tell on that question.
Reviewing Real Estate Sale Numbers and Trends For 2021
It is no surprise that home values have risen this past year. The two most popular styles of construction were yet again ranch style and two-story homes. Each lend themselves well to different population demographics. Ranch style homes were number one this year with the benefit of having larger lot sizes allowing for more “at home” activities, while the two-story home with its extra square footage living space came in second.
Single family ranch homes saw an overall average increase in values of just over 9% while single family two-story homes pushed almost to a 12% gain. The overall appreciation rate for single family existing homes that included all other construction styles was 9.2%.
These are big numbers and will be hard to beat in 2022, mostly due to a rise in inflation and an also rapid rise of mortgage interest rates since the first of the new year.
New construction is not included in the evaluation of Home Price Appreciation because new homes are essentially working off the cost of materials, labor, and the availability of development land. While the availability of land was not a big issue in 2021, materials needed for construction including lumber and mechanicals, appliances and labor have been in shorter supply. The median sale price of a new built home during the first half of 2021 was $10,000 higher compared to the first half of 2020, and the second half of the year was $29,800 higher than the second half of 2020. That’s a significant jump in pricing in one year.
The Results of Low Listing Inventory and High Buyer Demand
As a 2021 home buyer, you were either frustrated by the lack of homes to view, were rushing out the door at 10:30 a.m. to see a new listing because you knew that by 1:00 p.m. there would be multiple offers on it, or you were contacting your mortgage lender asking them to push your buying credit to the limits to be able to beat out a competitive offer. In the end, some of you won.
Many lost out and some gave up completely on the home search and extended the lease on a rental. Some would-be homebuyers that already owned a home, just decided to step back and either wait for a market slow down or spent the money they would have on a new home and made renovations on the existing one.
As a 2021 home seller, you also were experiencing frustration, but in many cases great feelings of elation as home buyers were willing to pay above—sometimes well above—the asking price of your home. Then came the panic and realization that now you would be in a position that could put you either into apartment living or moving in with a relative while storing the rest of your belongings as you now enter the market as a hopeful home buyer. The “profit” that you gained by selling your home at record high prices was often then spent by offering above list price on the home you were now competing to buy with other home buyers or in some cases paying for a short term rental and storage.
The Cost of Borrowing Money Comes to The Rescue
If anything is likely to change as we head down the road in 2022, it will be the rise in home mortgage interest rates. With economic inflation occurring in the country, home mortgage interest rates have officially begun to rise at the start of the year. Gone for now are sub 3% – 30-year fixed rate mortgages with the typical rate quoted on the street today around 3.25% and more rises coming weekly, if not daily. This is a tough change to many who were pre-approved last fall in the mid-2% range.
This could however open the door to a whole new buyer pool. There have been many homeowners that quietly sat out the sales frenzy of 2020 and 2021. Many were willing to wait out the market for a time that allowed them to avoid the multiple offer craze. True, this round of homebuyers may not get record high sale prices on the homes they are selling, but with a rise in mortgage interest rates, some buyers will be priced out of the market.
The rising cost of money may slow the market down just enough that the sales in “hours” could return to sales in days… and as a result, fewer multiple buyers offers and a drop in sales above the list price.