Fortune reports that home prices increased by nearly 20% in the last year, a rate of growth more intense and faster than ever in the run-up to the housing crash of 2008. The housing market in 2021 was turned into a giant bidding war by factors like lumber shortages, the exodus of remote workers, and record-low mortgage rates, but will the market crash in 2022?
You won’t need to search far for a doom-and-gloom housing market analysis that confirms the pessimist inside you which believes 2022 will bring an unprecedented collapse. It’s likely that the reality will be far less dramatic anyway.
The Current Growth Rate is Unsustainable, but There is Little Chance of a Crash
According to Yahoo, in the 4th quarter of this year and the same time next year at the end of 2022, Fannie Mae predicts home prices will rise by merely 7.9%. While nearly 8% might seem insignificant in light of the large gains of this year, 7.9% is near twice the average growth rate from its historical growth.
The Federal Reserve Bank of St. Louis has reported an average increase in home prices of 4.1% annually since 1987. If the many buyers who were priced out of the market in 2021 were expecting the bubble to pop and turn the tables in the buyer’s favor the following year, they should temper their expectations.
Most likely, the market will stabilize, but only to a point where the price appreciation is not as spectacular, but can still be impressive historically. Price increases will probably be much less than they were during the market’s historic run in 2021, even though the price market won’t fall.
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There are Forces at Work to Gently Ease Down Prices
A sudden crash in 2022 can be unlikely due to two conflicting narratives. Firstly, mortgage rates are on the rise. With COVID-19, interest rates were historically low, making borrowing money cheaper than ever before. A chance like this would likely never arise again, so people across the country rushed to lock in loans.
However, the record-low interest rates have already begun to climb. Next year, Fannie Mae expects 30-year fixed mortgage rates to rise to 3.3%. Once the cheap-money incentive wears off, demand – and price – will decline, bringing about the crash many pundits have forecast for 2022.
A second factor is, contributing to the price-smothering effect of rising interest rates. The demand for housing won’t crash, even if rates continue to rise. As Fannie Mae noted in its 2022 outlook, there is a “severe shortage of homes for sale,” which are “limiting interest rate effects on home sales and home prices of housing inventory.”
In addition to the supply being so tight, prices will still appreciate even at 3.3% mortgage rates, which historically are quite low. While the conditions for a sudden housing market crash are not present, it appears that demand and prices are ripe for gentle ease just beginning next year.
How Should We Move Forward?
In 2022, buyers hoping for the price to plummet are likely to be disappointed. The competition should ease next year and home prices will start to level out, but many buyers will lose out. They will face slightly higher mortgage rates in exchange for slightly lower housing prices.
This is likely to be a similar scenario for most sellers. However, sellers should benefit from higher prices and solid demand now compared to this time next year. However, those who rush to sell when the market is hot will become the buyers who are trying to overcome the same challenging conditions while searching for their own new houses to live in.
Since a dramatic crash in the housing market in 2022 is highly unlikely, it is prudent for both homebuyers and sellers to follow the principles that hold true during the hottest seller’s market, the coolest buyer’s market, and as well as other things. Don’t try to time the market. Act when you’re ready.