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Let's get right to it: The 2022 housing market seems likely to be a watered-down version of 2021. That means while price increases might be slowing and competition could be a little less intense, overall we're still looking at an abnormally hot market.
We wouldn’t call this a housing "bubble," because economists don’t expect prices to suddenly pop and start to deflate. But that's little comfort to would-be home buyers who've had offer after offer rejected. The stress of home buying and selling almost always puts people in their feelings, but in the coming year, emotions may be running especially high.
Here's how we think it could play out.
Rates will rise but still be pretty low
After hitting a record low of 2.66% at the tail end of 2020, interest rates on 30-year, fixed-rate mortgages did rise at the start of 2021, but then hovered below 3% for much of the year. While we're unlikely to see sub-3% rates again anytime soon, major forecasters aren't predicting huge increases for 2022.
On the high side, the Mortgage Bankers Association predicts rates will hit 4% by 2022's end. On the low end, Fannie Mae expects the 30-year fixed to average 3.4% at the end of the year. Those two organizations, plus Freddie Mac and the National Association of Realtors, predict that rates will rise steadily through 2022. When you take the average of all four groups' quarter-by-quarter predictions, you have the 30-year fixed averaging 3.33% in the first quarter and 3.7% in the fourth quarter.
This moderate increase seems like a fair prediction given the Federal Reserve's plan to slowly ease off its support of the market by tapering its purchases of mortgage-backed securities and Treasury bonds. The central bank's long-anticipated move already had market watchers looking ahead to higher rates throughout the second half of 2021.
But markets are fickle, and with uncertainty about inflation, employment and, of course, the pandemic, even the Fed's plan is explicitly laid out only through the end of 2021. We all seem to be in agreement that rates will zig, but that doesn't mean they can't zag.
Home prices will also rise, but not as quickly as in 2021
Median existing home prices experienced double-digit year-over-year increases throughout 2021, according to NAR data. And the highest median price — $362,800 in June 2021 — was nearly $60,000 over the median price in January 2021. September, the most recent month for which data is available, continued a late-summer trend of less heady increases, and forecasters project slower price growth will continue into 2022.
At the high end, Fannie Mae expects home prices to grow 7.4% year over year, with Freddie Mac putting its prediction at 7%. MBA anticipates a 5.2% increase, while NAR is the outlier with a forecast for just 2.8% year-over-year growth. Averaged, these give us a projected 5.6% growth in home prices in 2022.
That would bring a home that sold for the September 2021 median price of $352,800 up to a potential resale value of $372,557 in 2022. Even if the rate of increase is slowing, the idea of median existing home prices getting within striking distance of $400,000 is more than a little alarming.
Because what's slowing down home price increases? Spoiler alert: It's not that the inventory of available homes for sale is expanding. Demand may be weakening because potential buyers are being priced out.
"First-time home buyers are already getting priced out of the market at an increasing rate, and higher prices have pushed the percent of those who can afford a house below 30% for the first time in many years," Robert Frick, corporate economist for Navy Federal Credit Union, said in an email.
"Hopefully, higher prices will take the edge off demand," he added, which could cause sellers to pull back on escalating prices. "Still, due to demographic reasons, housing demand will stay strong for the foreseeable future, so a moderation in home prices likely won't be dramatic."
Current homeowners may put more equity to work
Thanks to the increases in home values throughout 2021, many homeowners are sitting on a considerable cushion of equity. ICYMI, your home's value minus how much you still owe on your mortgage equals your home equity. For most homeowners, becoming a seller in this market (yay!) would also mean becoming a buyer in this market (boo), so staying put and upgrading may be more appealing than moving.
For homeowners looking to renovate, a slight increase in interest rates wouldn’t necessarily be a deterrent to a cash-out refinance, home equity loan or home equity line of credit. Overall, mortgage analytics company Black Knight estimates that U.S. homeowners have roughly $9.1 trillion in tappable equity. More than $6 trillion of that equity belongs to households with credit scores north of 760, aka folks who are likely to qualify for the most favorable interest rates. Borrowing against your home always carries a certain amount of risk, but the temptation to treat yourself for having gotten through 2021 (and 2020) may be strong.
And even though upward-notching rates could make rate-and-term refinances less attractive, plenty of homeowners could potentially benefit from a basic refi. As of October 2021, roughly 11.5 million homeowners could refinance and drop their interest rates by at least 0.75%, per Black Knight.
Affordable homes will remain hard to find
The inventory of existing homes for sale grew throughout 2021, but stayed low enough that we're still nowhere near a buyer's market, or even a balanced one. When it would take six months or more to sell all the houses on the market at the current pace of home sales, the market is said to favor buyers. Less than six months' worth is a seller's market. The most recent NAR data for September 2021 has the U.S. at a mere 2.4 months' supply.
On top of that, homes that are affordable are even harder to find, as scarcity — among other forces — drives up prices. Examining home prices in the 100 largest U.S. metro areas, Harvard's Joint Center for Housing Studies found that in 2020, a household earning 50% to 80% of the area's median income could afford to buy a home in only 39 of those metros. If you think that sounds grim, in 2021 the number of affordable metro areas dropped to 20.
And that's with historically low mortgage interest rates helping make homes more affordable: Having to put less cash toward interest each month allows buyers to put more of their money toward their principal, or toward building equity.
"As tight as it was this year, the interest rates have kept buyers in the game," Anthony Carr, a broker with Re/Max West End in Falls Church, Virginia, commented in an email. But with rates and prices edging up, even if it's at a slower pace, buyers at the lower end of the market will be pushed out.
Sellers will still mostly have the upper hand
With inventory so low, most sellers can continue to expect multiple offers. The National Association of Home Builders regularly surveys buyers who've been searching for three or more months and found that in the third quarter of 2021, being outbid was the top reason those folks hadn't yet bought homes.
While some markets still have buyers offering top dollar for virtually any property that's listed, others are starting to see moderation.
Torrence Ford, a broker with Re/Max Premier in Atlanta, said in an email that "sellers that price accurately are still seeing pending contracts in 10 days or less," but to get the best offers, properties need to be in good condition. "Sellers are still needing to prepare their homes for a traditional sale with paint, deep cleaning, and having major repair issues settled," he said. "With those things in line, buyers are easily willing to waive inspections and appraisal contingencies."
He also mentioned that the breakneck pace of the market in his area has calmed somewhat: "Buyers are getting a fair shot at homes from listing agents and sellers allowing homes to sit on the market from a Thursday to Sunday."
Four days is now a "fair shot"? Compared with the recent craze of sellers asking for "highest and best" offers from a single day of showings, sure, why not. Four days may not be enough time to see a property twice, but at least you can sleep on it.
Buyers are getting fed up
While social media may not be an official barometer of the housing market, looking at exasperated memes, stupefied TikToks and snarky tweets makes it clear that home buyers — especially millennial and Gen Z buyers hoping to become homeowners — are getting salty. There seems to be a broadening understanding that this is less about their individual financial choices (like the much-mocked avocado toast theory) and more about the market failing to supply affordable housing that keeps pace with current demographics.
And though plenty of Americans are still hoping to buy homes, some are abandoning the search. The NAHB found that after peaking in the second quarter of 2021, the number of prospective buyers actively trying to find a home dropped.
Others are finding ways to do whatever it takes to get a home. "Sellers are getting greedy and buyers are getting smarter," Century 21 Affiliated agent Barry Shaw of Hudson, Wisconsin, said in an email. "Buyers have been getting creative with their offers to beat (the) competition." This can include workarounds that avoid a full home inspection and contingencies that cover potential appraisal gaps.
The determination of buyers who aren't giving up until they get an offer accepted guarantees that competition will remain intense, especially in desirable metros. Prices may go up, rates may rise, inventory could expand, but there's one certainty we can predict: People will keep on buying houses.