What Does the Future of the 2022 Housing Market Look Like?

Housing demand is expected to continue throughout 2022 with an estimated price rise of 4 to 6%, according to the National Association of REALTORS’ (NAR) Chief Economist Lawrence Yun. However, several factors could slow the pace of sales by around 3%, causing double-digit price increases, multiple offers, and offers over list price to become less common than in 2021.

But what does this mean for the housing market? Is it in a bubble, experiencing a slowdown, or headed for a crash? To find out, we need to consider economic growth and factors like inflation, rising mortgage rates, overall housing affordability, the labor market, COVID and its variants, and the uncertainty created by Russia’s invasion of Ukraine.

Inflation 

Sam Khater, the Chief Economist and Head of Economic and Housing Research at Freddie Mac, recently warned about the potential risks of inflation to economic growth. In Freddie Mac’s latest quarterly forecast released in January 2022, it was revealed that consumer price inflation (CPI) had spiked in 2021, reaching its highest level in 40 years, with a year-over-year increase of 7.0% in December 2021. Khater shared his concerns with Fox News, noting that inflation is no longer limited to supply-constrained sectors and is now impacting consumer sentiment, leading to a reduction in household spending to manage costs.

Mortgage Interest Rates

According to experts, due to the soaring inflation rates, the Federal Reserve is anticipated to increase the short-term borrowing rates to banks or federal funds rate by 50 basis points aggressively. This action is expected to be the first in a series of hikes in 2023. Banks will pass on the increase to consumers, causing a rise in the cost of home mortgage loans. As a result, sales volume and housing prices could slow down. Experts predict that mortgage interest rates will increase to an average of 3.6% in 2022 and 3.9% in 2023 from about 3% in 2021. However, a four percent average mortgage rate is not a significant increase, according to Yun. Freddie Mac predicts a decrease in housing price growth from 15.9% in 2021 to 6.2% in 2022.

Housing Affordability

In March 2022, NAR economists revealed that the Housing Affordability Index had declined in January due to two key factors. Firstly, the median family income had dropped by 4.5%, while the monthly mortgage payment had surged by 27.0%. These increases were caused by a rise in the benchmark 30-year fixed mortgage rate to 3.51% compared to 2.79% in January 2021, and a remarkable surge in the median existing-home sales price, which rose 15.9% from the previous year. Consequently, the monthly mortgage payment increased by 22.5% year-over-year, from $1,011 to $1,284.

To determine affordability, the indices consider whether 25% or less of gross household income is devoted to the mortgage payment, or principal and interest. However, other costs associated with homeownership, such as homeowner’s insurance, taxes, mortgage insurance, and property maintenance, also impact affordability. If housing costs exceed 30% of gross income, it becomes a burden to pay. First-time homebuyers, who typically spent 25.6% of their household income on housing, face more significant challenges with affordability than other homebuyers who can afford a 20% down payment and a monthly mortgage under 25% of their income.

Labor

The impact of the pandemic on the labor market is still evident as it continues to recover. Despite the unemployment rate reaching 3.9% in December 2021, the addition of only 199,000 nonfarm payroll jobs is a concern. Although job openings remained high at 10.6 million, nonfarm payrolls remain down by approximately 3.6 million from pre-pandemic levels.

COVID

President Joe Biden recently delivered his State of the Union address, calling for Americans to return to work in their offices and send their children back to school, signaling that the worst of the pandemic may be over. However, new variants of the virus continue to emerge, and the nation remains divided over safety measures. Despite the widespread availability of vaccines and booster shots, only 65% of the U.S. population is fully vaccinated. The vaccines are not 100% effective and only provide protection against severe symptoms for a limited time. While infections and deaths are declining and mask mandates have eased, the effects of small business closures, teacher and daycare shortages, and other economic impacts continue to linger. With flu season approaching, COVID infections are likely to resurface, posing challenges for families, schools, and businesses.

Russia’s Invasion of Ukraine

In 2021, foreign homebuyers accounted for only 1.8% of total home purchases, according to the National Association of Realtors’ International Transactions in U.S. Residential Real Estate Report. Among foreign buyers, Russians represented less than 1%. Experts predict that mounting geopolitical tensions may prompt investors to shift their focus to U.S. Treasuries, leading to lower interest rates. However, as the world’s top oil supplier, Russia could maintain oil prices above $100 per barrel, further fueling inflation and prompting additional interest rate adjustments that could impact the U.S. housing market. Despite these concerns, oil-producing states such as Texas, North Dakota, New Mexico, Oklahoma, Colorado, Alaska, and Wyoming are expected to boost global supplies, driving employment, housing demand, and home prices in these regions.

Hope for The Market

Housing experts are optimistic that more homes will become available in the near future. First-time homebuyers have become exhausted from competing in a tight market with skyrocketing prices and limited housing stock. This has caused some to drop out of the market. Second, more homeowners who believe that their homes have reached peak value are expected to list their homes for sale, thereby increasing supply. Affluent buyers who own second and vacation homes will face rising fees, which could result in more inventory. With lumber prices decreasing and labor paid better, homebuilders will ramp up production as well.

NAR recommends that prospective homebuyers expand their search area, get preapproved by a lender, and enlist the services of an experienced real estate agent to assist them in finding a suitable property.