Erik J. Martin / The Mortgage Reports Contributor / March 28, 2022 - 7 min read

 

Will home prices drop in 2022?

The price of homes has risen significantly over the past few years. Many hopeful buyers, especially those on tighter budgets, are eager to learn if and when home prices may become more affordable.

The consensus from experts? Don’t hold your breath.

Among the six real estate experts we interviewed, none expect prices to fall in 2022. And they caution that those who are in a place to buy should do so sooner rather than later, as prices and rates could continue to rise.

Sky-high housing demand isn't going anywhere

Many home shoppers and homeowners worry that prices have been artificially inflated over the past couple years. But rising prices have largely been driven by a supply-demand imbalance. And that dynamic isn’t going away any time soon.

“Head and shoulders above the rest is the factor of low inventory, which is here to stay for a while,” says Tabitha Mazzara, director of operations for Mortgage Bank of California.

According to the National Association of Realtors, there were just 870,000 homes on the market in February, with millions of shoppers vying for these properties.

“We are currently in a massive demographic wave. More millennials, the largest demographic in history, will turn 33 this year — the peak age when most buyers purchase their first home,” Bruce Ailion, a Realtor and real estate attorney, explains. “This cohort wants to start establishing households and own their first homes.”

 

Rising rates aren’t cooling the market as some expected

Nadia Evangelou, senior economist for the National Association of Realtors, says her organization expected to see decreased demand during the winter months due to seasonality trends in the housing market.

“However, demand remained very strong as many homebuyers rushed to benefit from low mortgage rates in the winter,” she says. “Recently, mortgage rates have increased, and the persistent imbalance between demand and supply has pushed up home prices.”

Rising mortgages would suggest that demand might cool. But the market has observed the opposite.

The rise in mortgage interest rates over the past few weeks would suggest that demand for homes might cool and home prices might drop due to the higher cost of financing. But the market has actually observed the opposite.

“Price appreciation has accelerated at the beginning of 2022, mainly due to the fear that rates will continue to rise,” notes Sean Casey, senior vice president and regional sales manager of Angel Oak Home Loans.

He continues, “The Fed has made it clear that their number one focus is to get inflation under control. Their best tool to achieve that objective is raising interest rates. This has led homebuyers to double their efforts to secure a home loan before rates get even higher and, in turn, home prices jump further.”

Why home prices aren’t likely to drop anytime soon

Some homebuyers are undoubtedly wondering if they should hold out on house hunting and wait for price gains to reverse. But experts caution that prices aren’t likely to drop in the near future.

“The lack of inventory and current demand to own a home will keep pricing pressure on an upward trend,” says Casey. “Additionally, Wall Street firms have an increasing appetite to add real estate to their portfolios. This means that homeowners are competing with each other for the limited amount of properties on the market and competing against Wall Street, as well.”

Mazzara echoes those concerns.

“Although we are seeing a lot of volatility in some sectors of the economy — including gas prices and the stock market — partially driven by geopolitical events, the basic law of supply and demand here in the United States will preclude any downward trend in home prices,” says Mazzara.

 

Will new-build homes help inventory?

An influx of newly-built homes could help the housing market in the long term. But there likely won’t be a boom in new inventory this year or even next. Builders simply can’t construct new homes fast enough to keep pace with buyer interest.

“While builders are doing their best to ramp up inventory, the new home industry has been underbuilding for over a decade, which has added to the pent-up demand,” notes Jason Will, senior vice president of Market Growth for Embrace Home Loans.

“As of February 2022, housing starts for this year have increased to 1.769 million, which is the highest since June 2006. But it will still take a couple of years at this level to bring a meaningful amount of inventory to the market,” he continues.

 

What could potentially force home prices down?

One thing that could slow down or reverse price appreciation would be a continued upward trend of interest rates coupled with a hit to the financial markets.

Mortgage rates above 5%

“If mortgage interest rates settle in above the 5% range, and we have a 20%-plus pullback in the financial markets, that could cause a drag on home appreciation. This would result in borrowers having less purchasing power, which could cool demand for homes,” Casey points out.

An X-factor that may further impact home prices and rates is the possibility of an expanded war in Europe, cautions Ailion.

“The pandemic will play a large role in the future of home prices, too,” Will says. “Many baby boomers have large equity positions in their homes but chose not to move during the pandemic. If this changes and they begin to downsize, it could add new inventory to the market.”

An economic recession in the U.S.

If the U.S. were to head into a mild recession, mortgage rates could dip, and another wave of homebuyers looking to take advantage of low mortgage rates would flood the market, says Casey. He adds that a refinancing frenzy could also emerge in late 2022 or early 2023.

Consider that home appreciation rates remain higher than the rate of inflation. That creates an incentive for many home shoppers to expand their offers and work even harder to land a home soon.

“The Fed’s increase in interest rates has lit a fire under many buyers. Many are now more determined than ever to not get their offers beaten again because they know the Fed will increase interest rates again,” explains Mazzara. “So over the rest of this year, I expect home prices to remain as hot as they have been.”

 

Home price predictions for 2022

Evangelou believes home prices will continue to rise across 2022 but at a slower pace.

“I don’t expect to see a repeat of last year’s double-digit price increases. Home price gains will slow down, mainly due to rising mortgage rates and more homes entering the market later this year,” says Evangelou, who anticipates home prices to increase approximately 5% to 6% in 2022.

Will subscribes to that theory.

“I expect home prices to rise throughout most of 2022 and begin to stabilize late in the year as inflation moderates, interest rates stabilize, and the effects of the pandemic continue to neutralize,” he says.

Experts predict home price growth will slow down from the record pace seen in 2021, though values could still appreciate by 5-10% this year.

Others are a bit more pessimistic about the cost of homes for sale.

“I expect home prices to rise, on average, up to 10% this year,” Ailion says. “Some markets will see lower appreciation rates while others will see higher appreciation rates, with the Sunbelt doing exceptionally well.”

Casey agrees with those sentiments.

“Based on the Fed’s aggressive plan to get inflation under control, I could see their policy causing the economy to slow down and maybe heading us toward a recession by the end of the year,” says Casey. “This would require a slowdown or even a reversal in their current interest rate policy.”

Should I purchase now or wait things out?

Many prospective buyers fall into one of two camps:

1. Some want to strive harder in the short term to claim a property before home prices and mortgage rates climb even higher than they are expected to
2. Others may wish to temporarily or indefinitely postpone a purchase in the hopes that prices and rates come down to more reasonable levels, especially if they’ve pushed their buying budget to the max

So what’s the correct strategy?

It’s worth buying if you’re in a position to do so

“My advice is to consider what your current situation is and whether or not the numbers work in your favor,” suggests Realtor Jason Gelios. “If you are looking to improve your living situation by purchasing a new home and plan on being there for years to come, then it makes sense to make a move in 2022 if you can afford it and can count on a reliable job and income.”

Evangelou also advocates for purchasing now if you’re in a favorable financial position.

“With even higher interest rates on the horizon, I don’t see any reason to hold off from purchasing a home right now. If you feel financially secure, you should start looking for a home,” she recommends.

No one can time the market perfectly

Keep in mind that mortgage interest rates, although rising, are still within affordable levels when put into a historical perspective (back in 1981, rates topped 18% for a 30-year fixed-rate mortgage). And trying to ideally time the rate market isn’t recommended.

“You can never time a market perfectly. If the home you are looking at meets you and your family’s needs and is not going to overextend your means financially, pull the trigger,” advises Casey. “The longer you wait, the more you will likely spend more money on rising rents and saving for the needed down payment.”

Your next steps

All in all, experts agree that low housing inventory and high demand are here to stay for the foreseeable future. That means home prices aren’t going to drop any time soon. So if you’re on the fence about whether to buy now or wait for a better deal, buying sooner rather than later might be wise.

That said, home buying is always a personal decision. Whether you should buy in 2022 depends on your financial situation and the local housing market where you live.

For a more detailed look at your finances and affordability, connect with a loan officer who can price out your budget and help you purchase a home within your means.