Last year’s perfect storm of supply constraints, low interest rates, and record-high demand led to a sharp increase in home prices. The median U.S. home price hit an all-time high of $404,700 in the third quarter of 2021, increasing almost 20% from the same period in 2020 per the U.S. Department of Housing and Urban Development.
If you’re looking for some relief in the crowded and competitive housing market in 2022, there may be hope in sight. “With more housing inventory to hit the market, the intense multiple offers will start to ease,” according to Lawrence Yun, the National Association of Realtor’s chief economist. “Home prices will continue to rise but at a slower pace.”
Whether you’re contemplating buying your first home, or are a real estate veteran, here are five real estate trends to watch in 2022.
1. Mortgage rates will continue to rise
After hitting an all-time low of 2.65% in January of 2021, mortgage rates have been on the rise. At the end of 2021, the average 30-year fixed-rate mortgage stood at 3.05%, based on data from Freddie Mac.
Most economists expect rates to continue increasing modestly in 2022. Redfin’s chief economist, Daryl Fairweather, predicts mortgage rates to rise to 3.6% by the end of 2022. While rising rates can be scary, keep in mind that rates are still at historically low levels. Before the Great Recession of 2008, mortgage rates never fell below 5%.
What does this mean for home-buyers? Assuming rates rise from 3% to 3.6%, a $300,000 loan will cost buyers an extra $100 per month.
2. Buyer demand and competition will decline
2021 saw an unprecedented surge in buyer demand due partly to a lack of inventory, work-from-home trends, and supply chain constraints limiting new construction. But Fairweather sees a shift toward a less frothy market. “2022 will bring more balance to the housing market,” she says. “But don’t expect a buyer’s market; just more selection, less frenzy, and slower price growth.”
Fairweather continues, “Low price growth will likely discourage speculators from entering the market and allow more first-time buyers to have a chance at winning a home.” That may be welcome news to new buyers exhausted by the pace of price increases and frustrated by multiple-offer situations.
3. Home value appreciation will slow from record pace
Economists generally agree that the blistering pace of home price appreciation will slow significantly in 2022. Notably, most economists do not foresee a drop in prices, only a slowing of the current trends.
A NAR survey of more than 20 economic and housing experts predicted that annual median home prices would increase by 5.7%, far less than the previous year. “Overall, survey participants believe we’ll see the housing market and broader economy normalize next year,” said NAR chief economist Lawrence Yun. “Slowing price growth will partly be the consequence of interest rate hikes by the Federal Reserve.”
If the 2022 predictions come true, buyers and sellers can benefit from a more stable market, allowing for better planning and budgeting. In the latest report from the Federal Reserve, the real estate component of household net worth increased $1.4 trillion, mainly due to home price gains. While home price appreciation is good for net worth, the annual payments due to increasing principal, interest, taxes, and insurance can lead to overall housing costs becoming a larger percentage of the household budget.
4. New home construction will increase
In 2021, building supply and labor shortages contributed to home-builders’ inability to keep up with demand for new construction. Mike Fratantoni, the chief economist at the Mortgage Bankers Association, sees the supply shortage starting to ease in 2022, leading to additional inventory hitting the market. “Home-builders will have more success overcoming current building material shortages and should be able to increase the pace of construction to meet the sizable demand for buying,” he said.
Fratantoni noted this is good news for home buyers. With more new-construction homes hitting the market, he expects a slow-down in price growth. “This is good news for the many would-be buyers who are currently priced out or delaying decisions because of low supply conditions and steep home-price appreciation.”
5. Real estate investors will continue buying
According to Danielle Hale, chief economist at Realtor.com, as home prices and rents rose in 2021, real estate investors continued to be net buyers of single-family homes. “In 2022, investors will continue to see solid returns from their investments in the housing market,” she noted in her 2022 National Housing Forecast. “2022 will be an excellent opportunity to receive high yields given the solid demand and projected rising rental prices.”
Most pandemic-era eviction protections have been lifted, and 2022 may offer a glimpse of a more typical return of supply-and-demand economics in the rental market. By all accounts, real estate investments have seen a significant boom during the pandemic, with REITs up nearly 29% last year.
Be prepared to buy or sell in 2022
Regardless of housing market trends and predictions, it’s a good idea to prepare before buying or selling a home. Danielle Hale recommends that buyers carefully examine their budget before starting a home search. Higher mortgage rates and increasing prices will affect affordability and monthly payments, so it’s a good idea to stick to a pre-determined budget.
Homeowners preparing to sell are in a good position going into 2022. Home values are predicted to continue their upward march, albeit at a slower pace. As the market begins to stabilize, Hale notes that sellers should be prepared to face potential competition, but fairly-priced homes will continue to sell quickly in many markets.
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Andrew Herrig is a finance expert and money nerd and the founder of Wealthy Nickel, where he writes about personal finance, side hustles, and entrepreneurship. As an avid real estate investor and owner of multiple businesses, he has a passion for helping others build wealth and shares his own family’s journey on his blog.
Andrew holds a Masters of Science in Economics from the University of Texas at Dallas and a Bachelors of Science in Electrical Engineering from Texas A&M University. He has worked as a financial analyst and accountant in many aspects of the financial world.
Andrew’s expert financial advice has been featured on CNBC, Entrepreneur, Fox News, GOBankingRates, MSN, and more.