With so much talk about whether or not the real estate market is going to crash in the near future, due to the unbalanced real estate market, it leaves a lot of people wondering, what will the real estate market look like in 2022? Well, the short answer is there’s so many variables that could change between 2021 and 2022. I mean take a look at how quick the pandemic overthrew the economy in 2020, putting millions out of work, creating an unbalance in supply and demand throughout numerous industries, all while transitioning a new president into office.
I may not be able to tell you exactly what will happen in 2022, but I can most definitely bring up data trends and research that will support my predictions.
The key factors to keep in mind when forecasting the real estate market in 2022 are: mortgage rates, home prices, housing inventory, and of course the economy overall.
As far as mortgage rates, the 30-year fixed rate mortgage is at 3% after being at 2.94% the previous week. The 15-year fixed rate mortgage is at 2.29% after increasing from 2.26% the previous week, and the 5-year adjustable rate mortgage is at 2.59% and remains unchanged from the previous week.
It’s no secret that there’s an abundance of buyers in the market for a home today, but it didn’t happen by accident. These 2.9-3% interest rates might feel like somewhat of a norm now, but just a few short years ago, let’s say March 24Th 2018 to be specific, Interest rates hit a 7-year high at 4.66%, which is up from 3.95% at the beginning of 2018.
In that year, we were still experiencing inventory shortages, buyer demand was lower because most people didn’t want to purchase a home with that interest rate, so buyers became conservative and purchased homes below their means with just enough space to get by to save a little money.
Where am I getting at with this information? That was 3 years ago and housing inventory is still slim despite a large difference in interest rates. My prediction is that interest rates will hit 3.6-3.8% by the end of 2022. Freddie Mac and the Mortgage Bankers Association both had a similar prediction, give or take a half of a percent.
Why are mortgage rates projected to rise? If you take a look back at when the economy declined over the years and began to show growth and improvement, mortgage rates would increase. The unemployment rate is decreasing, job growth is increasing, and the covid-19 vaccine has created signs of normalcy in the economy.
Since mortgage rates are projected to increase, it’s a given that the buyer demand will decrease, just like it did in previous years when the rates were hitting all time highs. As terrible as it sounds for mortgage rates to increase, it’s definitely something that will balance out the real estate market to say the least. It really is a catch-22, because on one hand in our current housing market, you have low interest rates with bidding wars driving housing prices sky high, and on the other hand you have higher interest rates with less dramatic bidding wars.
Alright so there’s less buyer demand and higher interest rates. What about home prices? As I mentioned before about 2018, a lot of people I have talked to throughout the year have been asking me when home prices and inventory will go back to normal, and the truth is, the economy isn’t just going to snap its fingers and everything magically go back to the way it was before.
In normal circumstances, these situations are gradual (aside from the pandemic’s influence). According to CoreLogic, home prices were up 10.6% year over year. According to a chart provided by CEIC data, the average home price growth is about 5.5% year over year, so it nearly doubled during the pandemic, and the closure of the real estate industry early 2020 didn’t help either.
This market has seen an unsustainable level of price growth, as it by far exceeds wages and earnings growth, and many economists believe that prices can’t keep growing at this rate forever. The real estate data company Zillow has actually predicted home prices will rise another 10.4% keeping the chart at a steady increase.
Home prices in 2022 will most certainly continue to grow, but the rate at which home prices increase will start to level out and not be so drastic according to national mortgage news. Home prices leveling out does not mean home prices will fall, so people who are looking to purchase a home in 2022 may face high prices, along with higher interest rates.
That may sound like the market is just inching toward another market crash, but a recent report from CoreLogic says otherwise. It was predicted in the middle of 2020 that with so many buyers maxing out their budgets and spending every little bit of cash they had offering over asking price on a property, would soon cause an early case of mortgage delinquencies and foreclosures, but believe it or not, they have declined month over month since August 2020.
CoreLogic went on to say Mortgage delinquencies have been slowly decreasing after peaking in mid-2020, and the rate of foreclosures remains at a 22-year low due to ongoing forbearance provisions. Improvements in the economy and job market this year will help borrowers remain current on their payments when forbearance is lifted later this year.
Referencing back to the 2008 recession, mortgage delinquencies and foreclosures soared across the U.S, but keep in mind that Mortgage lenders are no longer offering the high-risk products that were available during the housing boom in the 2000’s. Also keep in mind that market conditions do vary greatly at local levels.
As far as housing inventory, a report from Realtor.com stated that housing inventories are continuing to drop across the U.S, and there was a 50% decline in the number of homes for sale in March 2021, compared to 2020. Since new construction homes make up nearly 26% of today’s housing inventory, fingers are crossed to see a gradual rise in housing inventory throughout 2021. The biggest constraint that builders are having right now is supplies, and that will most likely still be an issue throughout 2022.
As far as the overall health of the economy, after a 31.4% plummet in the second quarter of 2020, the first quarter of 2021 saw a 6.4% growth according to the bureau of economic analysis, which directly reflects vaccine rollouts and businesses reopening. Unfortunately with all the COVID-19 relief throughout the past year, the federal debt has exceeded 28 trillion dollars which has already caused disagreements over how to begin reducing the debt.
Long term, there will be a rollback in some of the tax cuts and spending cuts to try and level off the debt. The national health spending is expected to grow at a rate of 5.5% from the year 2021 to 2023. Gas prices are also expected to return back to 2019 prices after the pipeline is situated. It is also believed that inflation will be around 2% in 2022 according to numerous forecasts done by the federal reserve. The slight improvement of the economy in each sector definitely takes the weight of a lot of people’s shoulders, and many economists believe the recovery depends on the distribution of the vaccine.
Let’s do a little recap for my 2022 predictions
Low housing inventory, high home prices, higher mortgage rates, and gradual economic growth is the prediction for 2022. I also believe that a lot of state and local housing markets will begin to favor renting over buying in this situation. The problem is, as home prices appreciate at an alarming rate, rent rates have followed in the hotter housing markets.
It’s safe to say that the people entering the real estate market are stuck between a rock and a hard place, but I believe that there’s still some light at the end of the tunnel. I’ve noticed that the majority of people purchasing a home in today’s housing market are looking for home’s that are 100% turnkey, and I don’t mean turnkey as in everything works and you can move right in, I’m defining turnkey as a home completely renovated with the times, modern technology, and no need of renovations for years and years down the road.
The problem with that is if you’re offering over asking price for a home that is 100% updated, you may find hardship making your money back down the road on the home. So it’s definitely recommended (not just in this crazy market) but all the time, to purchase a home that could use a little TLC (if you’re capable of course) so you can gradually put value into the home throughout the time you’re living there and make money off this investment when you decide to sell down the road.
I’m curious what everyone’s thought is on what the economy and housing market is going to be like in 2022. Throw your thoughts in the comments below.