If the wild ride of the residential real estate market has taught us anything these past two years, is that it’s anything but predictable. Even mortgage rate projections at the beginning of the year were off the mark in many cases. Between the pandemic, fluctuating mortgage rates, inflation, housing shortages, and other constantly evolving factors, it’s difficult to forecast where markets are heading.

Difficult, but not impossible. Knowledgeable experts can still provide insightful forecasts based on current trends, even for a short term. Since residential investments have proven to be easier to manage and steadily profitable on average, even short-term predictions can be useful.

Let’s look at current trends affecting residential real estate assets, including single-family -rental, multi-family properties, and vacation homes.

Will Record Demand for Single-Family Homes Drop?

Single-family rentals (SFR) have always been one of the strongest performers among residential investments, and insiders expect it to stay that way for the foreseeable future. That’s why it makes up such a substantial part of many real estate investor portfolios. The SFR market is presently valued at around $3.4 trillion. It’s also estimated to outperform multifamily in 2022.

One of the reasons is the increasing demand and low supply for single-family properties. Construction slowed considerably after the financial crisis in 2007 due to home builder bankruptcies and other factors, and it’s been declining ever since. In 2007, there were almost four million homes available. But in late 2021, there were only one million.

According to the National Association of Realtors®, the pandemic contributed to the record -low inventory by inciting a rush on residential market the last two years. The month’s supply of houses (the ratio of houses for sale to houses sold) is currently at about six months, which isn’t enough to meet the increasing demand.

New Home Starts Are Increasing — But So Are Interest Rates

The low inventory of new homes may be about to change for the better. Late last year, builders once again began construction on new homes. The Census Bureau reported in December 2021 that the number of housing starts in November were at 1,679,000. That’s the highest they’ve been since 1973. But, increasing interest rates may hinder or even put a stop to that.

As of May 24, the average rate on a 30-year mortgage was at 5.916%. The Federal Reserve is expected to continue raising interest rates to try and curb inflation. Yet, that plan may also curb home construction. Rate increases will make it more expensive for developers to take out construction loans. According to Robert Dietz, chief economist with the National Association of Home Builders, that will have an impact on housing inventory in three or four years.

Higher Rates Increasing Prices and Opportunities for Investors

Rising mortgage rates will also increase the cost of home loans for investors. Yet, on the bright side, it could lead to fewer buyers, so pricing for homes may moderate. That’s a potential plus for investors. Property values may also increase since valuations are pushed by a lack of supply.

At the same time, higher rates are preventing many growing younger families from purchasing their first homes. Instead, they are looking to leave their cramped apartments and rent a home, which means more SFR opportunities.

Renters Moving Into the Sunbelt

There is a mass migration to the U.S. Sunbelt. According to PricewaterhouseCoopers’ “Emerging Trends in Real Estate 2022” report, the top eight “markets to watch” are all located in southern states: Nashville, Tenn; Raleigh/Durham, N.C.; Phoenix, Ariz.; Austin, Tex.; Tampa-St. Petersburg, Fla.; Charlotte, N.C.; Dallas-Fort Worth, Tex. and Atlanta, Ga.

Those areas offer enticing growth prospects, more affordability, and job opportunities. A large percentage of the residents settling there include people taking advantage of the work-at-home trend to move to nicer areas, and a growing number of retirees seeking a warmer climate.

As a result, home values are increasing in those markets. For example, according to Zillow, the value of a standard home in Tampa has jumped nearly 30% in the past 12 months to just over $354,000.

Multifamily Property Opportunities Are Growing

The Census Bureau report also showed multifamily starts are keeping up with single-family homes across the country although higher interest rates may affect progress on those as well. Multifamily properties, including residential (four units or less), are some of the most popular investments because of high demand. Experts expect this market to continue to grow, especially because of the shortage of single-family homes.

Like SFR, multifamily rental communities are exploding in the South for the same reasons. Insiders are pointing to those states as key opportunities for investors in 2022.

People Are Traveling Again and Need Vacation Homes

While the pandemic all but gutted the vacation rental home market, investment prospects are looking better now that life is returning to normal — or closer to it. People are starting to travel again and they’re looking for pleasant, affordable places to stay away from pricey, crowded hotels.

Working remotely has also led to more people enjoying a new travel lifestyle. Now that they aren’t chained to an office, they’re free to take their families on vacation and work part-time if necessary. This means more potential renters needing short-term lodgings.

The factors increasing prices for SFR properties are an issue in the market, too. Low inventory, high interest rates, and increasing prices may raise the cost of purchasing houses, but there are good deals available.

Real Estate Still Considered a Great Investment

Even with the several shifting factors and uncertainties affecting residential real estate, reports still indicate it’s a worthwhile investment. According to a recent Gallop poll, the percentage of Americans that choose real estate as the best long-term investment over stocks, gold, savings accounts or bonds exceeded 40% for the first time since 2014.

Keep an eye on the market trends, do your research, and seek our industry experts for short- and long-term predictions. Opportunities are out there. You just need to find and recognize them.