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For this writer, Ed Pinto makes the most accurate predictions of all the real estate world’s data-crunchers on where housing prices are heading. Pinto, director of the American Enterprise Institute’s Housing Center and former chief credit officer at Fannie Mae, is constantly assembling proprietary data on newly issued mortgages that provide a road map for the months ahead. And what’s Pinto seeing now? He’s convinced the naysayers are wrong and that the gangbusters, double-digit run for home prices will keep rolling well into 2022. “Over the past three or four months we’ve heard lots of hand-wringing about a buyers’ strike, talk that people aren’t buying as many homes as before,” he told me in an interview on Oct. 27. “That’s a fake narrative.”

Home prices are still soaring

Pinto notes that indeed, the number of prospective sales has declined from the peak in June. But that downshift doesn’t mean the market’s cooling. “Buyers need to close by the end of the summer to get their kids in a new school,” he says. “So they need to sign a contract and secure a mortgage by June. That’s when we see always see peak purchase volumes as measured by number of new home loans.” The ranks of buyers that secure financing, or what’s known as “rate locks,” follow a seasonal pattern of declining gradually from the summer through the low point at year-end. “What matters is that purchase volumes are extremely high for this time of year,” says Pinto. To bypass the distortions caused by the pandemic, Pinto compares the buying activity for each week in 2021 to the same period in 2019. “2019 was a strong year,” he says. “The consistent message is that week by week the buying activity is well above the numbers of 2019, which means that 2021 is a really strong.” The week of Oct. 18–24 echoed the trend: Purchase volumes stood 54% above their robust readings for the same period two years ago. “Even though rates are ticking up, the volume of home purchases is not declining as much as one would expect for this time of year,” says Pinto.

The sturdy pace of purchases is sustaining price increases near the year’s summit, despite a significant rise in mortgage costs. The rate on the 30-year home loan is now hovering at 3.25%, its highest level in 15 weeks, and well above the 2.75% mark at the start of 2021. The rise in homebuyers’ monthly nut is slowing the upward march just a bit. The AEI’s calculations for actual recorded closings, comparing “constant quality” or like homes, showed a nationwide, year-over-year price increase of 16.3% in September. That was slightly below the multi-decade record of 16.7% in August, which Pinto tags as probably the high-water mark of this housing boom. Pinto’s mortgage data forecasts that the higher rates will continue to slow appreciation, but just modestly. “We’re projecting 14% to 16% increases in November and December,” he says. “Much like the inflation surge everyone’s talking about, the explosion in home price appreciation isn’t transitory.”

The special forces that will (most likely) keep housing hot

Pinto cites four principal factors that are powering the trend. First, he observes that although rates are up from a couple of months ago, they’re still extremely modest versus history. As recently as late 2018, the 30-year was considered a good deal at just under 5%. “The Fed continues to spike the monetary punch bowl, and that’s leading to lots of demand,” says Pinto. Second, the government-sponsored agencies that guarantee the vast bulk of America’s home loans are loosening standards, for example, eliminating the limit on “risk layering” by Fannie and Freddie and raising their affordable housing goals. “That’s creating more leverage for buyers,” declares Pinto. “It’s another punch bowl that stirs still more demand.” Third, inventories of houses for sale are extraordinarily slender. Loads of buyers are bidding for a narrow choice of listings that sell fast, a dynamic that’s driving prices skyward. Even the potent rebound in new construction isn’t enough to match the rampage in buying. The standard dividing line between a buyers’ and sellers’ market is six months of inventory. Today, the stock of houses featuring for-sale signs sells out in six weeks.

The great arbitrage: migrating from the high-priced to bargain metros

The fourth factor is one of the landmark shifts born of the COVID crisis. “In the work-from-home economy, many people no longer need to live within commuting distance of their offices,” says Pinto. “You don’t need to live near the Salesforce building in downtown San Francisco to work there. The work-from-home economy has unleashed millions of people from commuting to jobs in core urban areas or living in expensive urban metros.” For the first time, homebuyers can collect their Manhattan, or San Jose or Los Angeles salary, sell their high-ticket homes there, and buy something much bigger and better in Phoenix, Boise, or the Inland Empire, while trading their cubicle in a city center high-rise for a home office.

What Pinto labels “the arbitrage opportunity” is greatly benefiting the market that usually rises least in a housing bonanza, the high end. The reason: Buyers fleeing coastal cities are buying in the top tiers in inexpensive Sunbelt metros, where the bigger, fancier homes cost a lot less than the ones they’re selling. Though upscale choices in the bargain locales are appreciating faster than rivals in a San Francisco or Seattle, the gap remains enormous, and a powerful magnet for families unshackled to shop the nation for great buys. “I was looking at the median-priced house in San Jose,” says Pinto. “It was $1.16 million in September 2020.” Meanwhile, the average in Phoenix was only $325,000, 28% of the price of the average in San Jose. Pinto continues, “Last year, that house in San Jose rose 8% to $1.25 million, and the one in Phoenix increased three times faster, at 25%, to $405,000. But the house in Phoenix still cost just one-third as much as the house in San Jose.”

The move from San Jose, L.A., or Boston to a Phoenix or Jacksonville would also give the refugee a lot more residence for their money. “In San Jose, you’d be living in a starter house at that median price,” says Pinto. “In Phoenix, you’d get a much bigger lot, and a much bigger, nicer house.” A large number of the families leaving the pricey metros are buying not the middling but higher-end homes using cash from selling their current, high six- or seven-figure ranch or colonial, and still banking hundreds of thousands of dollars. In Phoenix, overall prices have increased 25% in the past year, but what Pinto classifies as “medium-high” category rose 30.9%, versus the overall gain of 27%. In Cape Coral, Fla., “high” and “medium high” both jumped over 30%, compared with under 27% across all tiers, and in Jacksonville, the two upper buckets both hit 25%, beating the metro-wide mark of 22%.

What could stop the housing boom

As of September, the top 10 performing metros were all venues that offer super buys you don’t find on the coasts. Four are in the nonglamorous parts of Florida: Cape Coral, North Port, and Tampa on the Gulf Coast, and gritty Jacksonville in the Sunshine State’s northeast. Arizona boasts two entries, Tucson and Phoenix, which led the nation with that incredible 27%-plus jump. Austin and Las Vegas round out the top eight. San Diego ranks ninth, and Miami and Nashville are tied for the 10th spot. Amazing, even the worst markets did great compared to most periods. Lowest-ranking Washington, D.C., rose 9.2%––it was the sole metro in single digits––and two and three from the bottom, St. Louis and Pittsburgh, both rose around 11% over last year.

Pinto sketches two possible scenarios for the future. In the first, mortgages rates rebound to 4.5% or higher. “That jump would severely slow the overall rate of appreciation,” he says. “In an expensive market like a San Francisco, L.A., Boston, or New York, prices would be hit especially hard.” Pinto notes that in periods of rising rates, it’s the extremes that get pounded. “People who were going to buy a $1 million house buy an $800,000 house instead or stay put. And families at the low end don’t move because they are priced out by the higher rates. Demand tends to move more toward the middle, so that broad middle tier tends to do better.” But even if a jump in rates chills sales overall, he adds, extremely inexpensive cities could keep thriving. The differential between a Phoenix or Boise and metros in the Northeast and West Coast are still so huge that waves of exiles would likely keep coming.

In the second narrative, rates remain super-low in the 3% to 4% range. Pinto says that gains of 13% to 15% in January are already baked in, and that “by June or July appreciation will still be in the low double-digits or just below 10%. The average for all of 2022 would be 10%-11%; it might even be 12%.” Exiting 2022, if rates are at sub-4%, prices will still advance at around a brisk 7%, well above the historic trend.

“I see no normalization for some time in the absence of a big rise in rates,” says Pinto. Eventually, though, the boom will create a major affordability problem that will first strike the coastal metros that are still advancing in double digits, and eventually reach the venues offering those super buys. “Take L.A. versus Riverside,” says Pinto. “In the former, the median price rose from $734,000 to $830,000, or 13%, in the year ended in September, while in Riverside, prices went up 18% from $420,000 to $495,000. Riverside went from 57% of L.A.’s prices to 60%. At some point, people are going to say the price difference isn’t enough for me to move to Riverside.” Pinto doesn’t know if the ratio is 80% or 85% or another number, just that it takes a lower price in Riverside to draw families from the allure of L.A. When that tipping point arrives, Riverside’s price fiesta will end. Eventually, high prices will correct high prices. Houses will take such a huge share of a family’s pay that folks rent or stay put, the buying collapses, and prices drop. But that day of reckoning may still be a ways off.