What Will The Real Estate Market Look Like in 2022?

The housing market forecast for 2022

If you’re looking to buy a home in 2022, you’ll face a seller’s market for yet another year. The continued presence of pandemic restrictions and perks like remote working will create an environment in which buyer demand outstrips house supply. That said, price and interest rate growth are slow out of the gate. If you’re thinking about buying a house this year, it’s a good idea to make an offer in the slow season (winter and spring) to secure the best price and interest rate.

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After the COVID-19 pandemic fueled a severe seller’s market in 2020, 2021 proved to be a very unpredictable, volatile market that nonetheless still favored sellers. Although predicting the housing market is a bit like your first time playing darts, that doesn’t stop people from trying to forecast market conditions. After all, buying a house is a huge financial step that you want to plan for as much as possible.

Here, we’ll recap the conditions that defined the 2021 housing market before delving into some predictions for 2022. A brief tease: The 2022 housing market will still tilt towards sellers, but savvy buyers may still find some good deals if they plan well.

Looking back: 2021 housing market trends

By June 2021, the national median home price hit an all-time high of $362,800, according to the National Association of Realtors (NAR). By December, it dropped slightly to $358,000.

Low mortgage rates and limited supply powered the national price surge. According to Redfin, there were just 1.38 million homes for sale in June, a 23% reduction from the previous year. 

As the pandemic continued to impact the way Americans live and work, many pursued remote work in less expensive areas of the country, flooding the market with buyers. Plus, historic economic growth after the 2020 recession — best illustrated by a booming stock market — put more money in the wealthiest hands, prompting more affluent Americans to buy second homes. New home construction failed to keep up, ensuring a very competitive market for all prospective buyers.

The NAR’s annual profile of home buyers and sellers found that about a third of buyers in 2021 paid above asking price. The report also found that the median time a house stayed on the market was an astonishing one week, a drop from three weeks in 2020.

The 2021 housing market was, to put it mildly, stacked against buyers. Several factors combined to pour more buyers into the market than it could handle, spurring one of the most competitive housing markets we’ve ever seen.

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Looking ahead: 2022 market predictions

While 2021 saw historically high prices and competition, 2022 may see both rise again. If you’re a potential buyer, that’s not what you want to hear, of course, which is why it’s important to take advantage of seasonal lulls in the housing market. Winter and spring are good times to buy a home, so if you’re on the fence about buying a house, consider this a nudge to make a decision more quickly.

Otherwise, you may have to contend with some of these market conditions in 2022.

Increased prices

The NAR surveyed 20 economic and housing experts on their predictions for 2022. That group predicted that median home prices will rise 5.7% this year. They forecasted 920,000 new home sales in 2022, compared to about 800,000 in 2021, while they project existing-home sales to dip to 5.9 million sales from 6 million in 2021.

Those projections show consistent housing availability, indicating that experts believe there will be even more buyers in the market driving up home prices.

Still, that’s better than Zillow’s projection of 11% price increases. While most experts agree that median home prices will increase, you can probably expect increases to happen slower at the start of the year before spiking during the summer months, when most people go house hunting.

As a bonus, the NAR experts highlighted these housing markets as “hidden gems”: Knoxville, TN; Spartanburg, SC; Fayetteville, AR; Dallas-Fort Worth, TX; Huntsville, AL; Tucson, AZ; San Antonio, TX; Daphne-Fairhope-Foley, AL; Pensacola, FL; and Palm Bay-Melbourne, FL.

Higher interest rates

One of the chief drivers of home buying over the past two years has been very low mortgage interest rates. That, however, stands to change in 2022.

Bankrate projects the 30-year fixed mortgage rate to peak at 3.75% in 2022, before falling back around 3.5% at the end of the year. That’s a stark increase from 2021’s average interest rate of 2.79%.

In addition to interest rate increases, the Mortgage Bankers Association (MBA) forecasts mortgage originations for purchases to grow 9% in 2022, driving greater competition in the marketplace. However, they also predict the 30-year fixed-rate mortgage to rise to 4% by the end of the year, putting more pressure on buyers while discouraging current home owners from refinancing.

Mortgage rates have already increased in 2022, to an average of 3.55% as of January 27, 2022; another reason to consider buying earlier in the year rather than later.

Smaller markets will continue to see big booms

While there has been practically endless coverage of young people leaving big cities, they aren’t just moving to the middle of nowhere. They’re moving to smaller cities and suburbs. We touched on some of the markets that the NAR thinks will see significant growth in 2022, but those are just scratching the surface.

Zillow’s 2021 Mover Report showed that Austin, TX was the hottest market of the year while Phoenix, AZ and Charlotte, NC rounded out the top three.

As these cities continue to experience booms, prices will increase, making other more affordable, nearby markets more attractive. Since flexible work options remain in place throughout most of the country, Americans will likely continue to relocate to larger homes in more affordable cities. 

But here’s a prediction: Many new homeowners will look to buy second homes either in downtown areas or in nearby suburbs, depending on where they currently reside. With the right market conditions, some young people will look to diversify their assets by adding a rental property to their portfolio. Some may even choose to buy an investment property in an emerging market before buying a primary residence.

In an economy that has largely excluded Millennials and Gen Z from decades of growth, the remote work wave will push more buyers into markets like Columbus, OH, Harrisburg, PA, and Indianapolis, IN.

New construction won’t do enough to offset demand

Despite the NAR projecting some slight growth in new-home sales, new construction won’t be enough to meaningfully offset the demand. Years of underbuilding won’t come undone in just one year of positive movement. Zillow research indicates that the 35 largest housing markets have seen a shortfall of 1.35 million new homes since the 2008 housing crash.

That said, single-family builder confidence is high, registering 84 on the NAHB/Wells Fargo Housing Market Index, after a peak of 90 in November 2020. There is a sustained effort to get new houses up to meet this massive demand. The gap between supply and demand should shrink in 2022 but a housing shortage will still define the market for years to come.

With a continued shortfall of available housing, buyers can expect bidding wars, especially on new construction homes in new developments. Likewise, if you buy a plot of land and aim to build your own house, high materials and labor costs may make building your home less financially responsible than other years.

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