Will the housing market crash in 2022? Utah facing imbalance, but no bubble

Utah is among the top states in the West and the nation with record-breaking housing price increases — and is now facing a “severe imbalance” in its housing market.

Housing prices have skyrocketed so much, now more than half of Utah’s households are unable to afford the state’s median priced home, which for single-family homes was $460,000 in 2021. For renters, these relentless price increases mean the path to ownership has narrowed even further.

That’s according to the latest research released Wednesday by the University of Utah’s Kem C. Gardner Policy Institute in a report titled the State of the State’s Housing Market.

By the end of 2020, Utah’s median home sales price climbed to $380,000, pricing out about 48.5{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} of Utah households. Prices continued upward in 2021, and now more than 50{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} of Utah households can’t afford to buy. For renters, realities are even more challenging. In 2019, the median priced home was already out of reach for about 63{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} of renter households. In 2020, that share of priced-out renters increased to nearly 73{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82}, according to the report.

“Utah has a long history of rapid price acceleration in housing,” said one of the report’s authors, James Wood, the Ivory-Boyer senior fellow at the University of Utah’s Kem C. Gardner Policy Institute, during a panel discussion about the report Wednesday morning.

But over the past year, especially as the COVID-19 pandemic disrupted supply chains and threw the national housing market into upheaval, Utah’s housing market has emerged as one of the hottest in the nation, second only to Idaho. In the second quarter of 2021, Utah’s housing prices increased a staggering 28.3{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} from 2020, ranking No. 2 in the nation for year-over-year percent increase. Idaho saw a jaw-dropping increase of 37.1{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82}.

There are some mind-boggling figures out of some of Utah’s more desirable locations, like Summit County, home of the ski resort destination of Park City. There, the median sales price shot up by nearly $350,000 to $1.15 million in 2021. Nearby, in neighboring Wasatch County, the median sales price was nearly $758,500, the state’s second-highest priced housing market.

“An aberration, anomaly or outlier? I’m not sure,” Wood said. “But this last year, in my work on housing over many years, we’ve never seen anything like this.”

Does Utah have a housing bubble?

Naturally, seeing as prices have rocketed beyond what they were prior to the 2008 housing market crash and the ensuing Great Recession, Wood said he’s often asked, “Do we have a housing bubble?”

“I believe that a housing bubble is unlikely,” he said. “First of all, bubbles are defined by a prolonged period of price decline, not deceleration or moderation, but actual price decline.”

Even though both “brief and prolonged” price declines in Utah have always come with job losses and recessions, “neither appears likely in the next two to three years,” the report states.

“And I think the financial markets and household balance sheets are much better off than they were when we had what I consider really (Utah’s) only housing bubble,” Wood said, during the Great Recession when the state saw 15 consecutive quarters of declining housing prices.

Seeing no bubble about to pop, housing experts like Wood see no end in sight, though price increases may slow slightly if mortgage rates bump up. But prices will likely remain expensive.

In 2022, “price acceleration and production are expected to remain positive in 2022,” the report states. The year “will be dictated by mortgage rates, while demographic tailwinds are expected to keep housing demand robust for the rest of the decade.”

An average of eight mortgage rate forecasts shows the 30-year mortgage rate rests at 3.1{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} in 2021 and is expected to climb to 3.6{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} in 2022. “While this isn’t a dramatic rise in rates, it is expected to impact affordability and bring price acceleration in Utah to single-digit growth,” the report states.

What’s exacerbating Utah’s ‘affordability woes’

The COVID-19 pandemic created “unprecedented conditions” in the national housing market by disrupting the labor market and supply chains (with 30{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} of construction materials imported from China). Plus, the Federal Reserve “distorted” demand through lower interest rates and an “extraordinary increase in liquidity via quantitative easing.” Those moves “triggered high rates of demand, which in turn pushed up housing prices to record-breaking levels,” the report states.

Dejan Eskic, senior research fellow at the Gardner Policy Institute, noted the lower interest rates allowed buyers to buy more expensive homes with lower monthly payments — but that’s “masking that price acceleration.”

“Buyers are able to afford more of the mortgage without changing their monthly payment, so that also helped drive up prices in 2020 and 2021,” Eskic said. “What it also did is added to our affordability woes we’ve had over what feels like the last decade.”

All this has exacerbated what housing experts have for years been sounding alarms for, even before the pandemic: Utah’s housing shortage. The cumulative shortage from 2010 to 2020 totals 44,500 housing units, the report states, leading to record-low rental vacancy rates (now at about 2{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} along the Wasatch Front), the smallest supply of unsold vacant homes, and the smallest supply of vacant for-sale existing homes.

“In other words, the shortage has removed vacant units from the housing market, an unhealthy condition leading to higher housing prices and rental rates,” the report states. “Given the sizable gap between household growth and housing units, it will take several years for the housing market to return to a healthy condition.”

So what are the solutions? Wood said policymakers — especially at the local level, starting with city councils, planning commissions and zoning ordinances — need to make room for all types of housing, especially more affordable housing like apartments and accessory dwelling units (also known as mother-in-law apartments).

They also need to prioritize preserving existing affordable housing, Eskic said.

“It’s very challenging,” he said. “But preserving the current affordable units from going to investors that basically flip them and jack up the rents … I think preservation is the low-hanging fruit right now.”

Are big hedge funds, investors and cash buyers to blame?

Another common question housing experts often hear is whether Utah’s housing prices are being driven up by cash buyers or investors swooping in, snatching up properties and flipping them for a quick profit as a sale or as a rental property.

Matt Ulrich, president of the Salt Lake Board of Realtors, said it’s not happening as often as some Utahns may think.

“People think it’s a lot higher than it is,” Ulrich said, estimating 18{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} to 20{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} of Utah properties sold are purchased by cash buyers.

Homebuilder Paul Peterson, regional president at Richmond American Homes, said that figure is even lower in his vantage point.

“As a company we’ve experienced even lower than that,” he said. “Ironically, I thought we would see more cash buyers, but it’s not necessarily the case. We’re seeing a pretty consistent amount of cash buyers we would have seen prior. Maybe a small increase, but not necessarily something that would register for me.”

As for how many investors are flipping properties, about 16{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} of Utah’s market is investor driven, Eskic said, with about 25{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} in Salt Lake County. As for the “big Wall Street firms” or the hedge funds, Eskic said “they’re still relatively small in our market, about less than 2{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82}.”

While real estate remains a lucrative business, Ulrich noted investing when prices are this high also comes with a cost.

“Everybody wants to get into real estate,” he said, but he added investment properties can be “tough to find. There’s just as many, but the profit is not as big, so I’d say it’s kind of evening out.”

Peterson said his company is “selling to real buyers” who are planning on living in the home. “But I do believe there are a higher number of people looking for an opportunity to Airbnb a basement or find a way to offset that higher increased payment.”