U.S. Housing Market Predictions for 2022

Will the housing market in the U.S. continue to grow in 2022? If so, how much more growth can be sustained before another housing market bubble bursts? How far will interest rates rise over the year and how will we deal with a historic shortage of housing stock? Any predictions on which way the housing market is heading this year depends on the answers to these questions. After considering those answers carefully, here are some of the predictions we have about the housing market for 2022.

Rising Mortage Rates

The Federal Reserve will raise interest rates in 2022. Of that, there is little doubt but how much is the question. Some experts believe mortgage rates will rise to between 3.875 percent and 4.375 over the year. Some believe that this will happen in increments of two or on a quarterly basis. Keep in mind that a one percent increase in the interest rate translates to an 11 percent increase in home prices. As a result, homes will be about 15 to 20 percent less affordable this year. 

This is another reason to act fast. If you’re planning on buying a home in 2022, sooner is better. For now, the overall market remains hot despite the inflation and economic turmoil caused by the pandemic. It’s competitive for sure, and it is tightening, but for now, there are homes available for motivated buyers.

A Continued Housing Shortage 

The ongoing pandemic has changed the way we live and work in this country. With many people working remotely and with many doing so on a permanent basis, the whole live/work situation is being reconsidered. The switch to remote work means many Americans can live wherever they want. They can live in the suburbs or even rural areas without worrying about a long commute. It has also forced many to rethink their entire careers. 

This change in the work location of so many Americans combined with the low rates on mortgages over the last several years led many people to consider purchasing new homes. When that increase in demand for housing comes up against a shortage of building materials and other supply chain issues, a deficiency in the availability of affordable housing options occurs.

According to Sam Khater, chief economist at Freddie Mac, the housing market in the U.S. is 3.8 million single-family homes short of where it needs to be in order to meet demand. This is a rise of 52 percent since just four years ago. This is the result of the underbuilding over the past ten years. The problem will get worse as more Millennials enter the market. Millennials are a larger demographic than Boomers by almost 20 percent.

Housing markets across the nation continue to feel the effects of extremely low inventory and high buyer demand in the single-family housing market. If the Fed does in fact raise rates on a quarterly basis this will act as a form of inflationary control. As a result, we should see a slight decrease in buyer demand as higher interest rates usually mean fewer buyers in the market. This will likely ease the market slightly, but we will still see values continue to rise this year. 

Not a Time to Panic

Worries about a crash in the market are understandable, but what happened in the previous crash of 2008 was a result of homeowners not being able to make their monthly mortgage payments due to creative financial packages such as interest-only payments. This led to over-leveraged buyers who could not sell their property and had to short sale or foreclose. Additionally, banks were then left with properties that they couldn’t sell and they took massive losses. This resulted in a loss for everyone.

The current market is much different. Lenders got hurt so badly last time and are more regulated now, so they are not granting risky loans. If a homeowner is forced to foreclose in the current market they would be left with a marketable property. This would help the inventory issue we currently find ourselves in. 

An Increasing Burden for Homebuyers

What we will likely see more of this year, and it’s already starting to happen, is that home price increases are running up against interest rate increases. This raises the amount of principal and interest (P&I) payments needed to buy an average-priced home. For a single-family home with 20 percent down on a 30-year mortgage, the P&I payment rose 32 percent from December of 2020 over the same month of 2021. This means a higher percentage of the median household income is going to mortgage payments. That percentage was 22.4 in 2020 but had risen to 25.8 in December of last year. Twenty-five percent was the average before 2008 so we are now looking at the least affordable housing in 14 years.

The Seller’s Market Continues

Many economists believe the housing shortage could last as long as 15 years as new construction catches up to the pressing demands on our growing population. As a result, the overall market in the U.S. will continue to favor sellers for the foreseeable future. This is great news for sellers, of course, yet a bit problematic for buyers. Even so, it’s still a great time to buy even though interest rates are on the rise and real estate appreciation will outpace rates which equates to a sound financial investment on all fronts.

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