Expert Predicts the Housing Market for 2022

Every so often, the real estate pendulum swings from what is commonly referred to as a seller’s market to a buyer’s market or from a buyer’s market to a seller’s market, but it inevitably swings back in the other direction at some point. Exactly when that pendulum will reverse direction and how far it will swing is the topic of much speculation, especially at the beginning of a new year.

Kent Ritter is an experienced multifamily investor and operator helping you to build real wealth through real estate syndication. Learn More.

In Retrospect

The 2020s got off to a roaring start, in terms of the market for real estate, the pendulum swinging in favor of sellers. Low interest rates and the freedom to relocate afforded by the ability to work remotely prompted many to consider buying their first home, only to be confronted with soaring home prices, limited inventory in their price range, fierce competition from cash buyers, and bidding wars. Sellers benefited greatly from rapid sales, often within hours of a property being listed, and from multiple offers well above asking price. 

A strong housing market in 2020 and 2021 attracted real estate investors as well as first-time homebuyers. 

Moving Forward

Will that strong housing market continue in 2022? Although most experts expect to see some moderation in price growth as interest rates rise to counter inflation, the consensus appears to be that the market won’t lose much strength in 2022—just enough to suggest that the pendulum might swing back slowly toward a more buyer-friendly market. You’ll often hear the word “normalization” in discussions of the real estate market outlook for 2022, suggesting that a better balance between sellers and buyers is on the horizon.

Drivers of Demand

The demand for housing is historically driven by mortgage interest rates and demographic trends. As many Baby Boomers are downsizing to retirement housing, most millennials are of an age to consider buying their first home. At the same time, rising mortgage interest rates will erode the buying power of potential purchasers, making home ownership less affordable for them. It’s reasonable to think that those anticipating rising interest rates will continue to move forward with their efforts to buy a home before an increase goes into effect.

Home Price Predictions

Potential home buyers hoping to see housing prices decrease significantly in 2022 are likely to be disappointed. It’s far more likely that home sale prices will continue to rise, but at a slower pace than in 2020 and 2021, which saw the largest increases in home prices in nearly half a century (a 19% increase between September 2020 and September 2021). Prices will increase because of the limited albeit growing inventory–but as rising interest rates make affordability a more pressing concern for many potential buyers, the upward pressure on prices should moderate. Many predict home price gains in 2022 to be between 2.5% and 3% over the 2021 level. Zillow is a bit of an outlier, predicting 11% growth in home value during 2022, while Fannie Mae and Freddie Mac have predicted increases of 7.9% and 7% respectively.  

Growth, yes, but slower growth than the industry saw in 2020 and 2021. Bear in mind that projections of housing price increases reflect the national real estate market as a whole and may not apply in smaller markets or in the highest-priced markets.

Housing Inventory

The nationwide housing inventory has remained inadequate since the 2008 recession, and the shortfall grew during the pandemic. Experts generally agree that the inventory of homes available for purchase will increase in 2022, but by how much is subject to debate.

More existing homes are expected to come onto the market as current homeowners aim to relocate and real estate investors sell off multi-unit residential properties while prices are still high. Also, with most Baby Boomers in or approaching retirement, one might expect them to downsize, which would add to the housing inventory. However, many older homeowners are likely to defer selling because the lack of inventory in their price range is making it hard for them to find a replacement. 

Additionally, the increase in available housing from new construction is expected to be meager, as pandemic-related supply chain disruptions and labor shortages are making it difficult for developers and builders to bring new homes onto the market. Furthermore, municipalities are not quick to issue permits for the high-density construction that would provide both affordable housing options for many who are priced out of the single-family home market and opportunities for investors in multi-family housing. 

So, while inventory should increase somewhat over the 2021 level, housing is expected to remain in short supply through 2022 and beyond. It is likely to take a few years for inventory to reach a level that matches normal demand.

Mortgage Rate Predictions

While experts generally agree that mortgage rates will rise during 2022, the size of that increase remains in question. Many expect the increase in the 30-year fixed-rate mortgage interest rate to be modest and probably incremental. Forecasts suggest that it will top out at 3.5 to 4.25 by the end of 2022, though some predict only a small initial increase and stabilization at around 3.25 percent. 

Key factors leading to these conclusions include continued economic growth and certain actions the Federal Reserve is likely to take to keep the national economy from overheating, such as increasing 10-year Treasury yields and tapering its purchases of mortgage-related securities. Despite anticipated increases, mortgage interest rates will still be favorable for homebuyers.

Is There a Danger of the Housing Market Crashing in 2022?

A housing market crash like the one in 2008 is not at all likely in 2022. The economy is making a strong recovery after the recession caused by the Covid-19 pandemic, and unemployment is very low. Additionally, the factors leading to the 2008 crash no longer exist. In 2008, the rapid increase in home prices and subsequent crash was fueled by bad lending practices and credit policies that put many buyers into homes they could not afford.  In 2022, price appreciation in the housing market is being driven by supply and demand and lending rules are much stricter. With low inventory and high demand, even mortgage interest rate increases that outpace and exceed expectations would be extremely unlikely to precipitate a housing market crash.

Will 2022 Be a Good Time to Buy?

Attempting to time the housing market is rarely a good idea. You should always base home purchase decisions on one’s personal goals, life circumstances, and finances. Sometimes it makes sense for aspiring homeowners to delay a purchase, even when market conditions are favorable, while they work on improving their credit or amassing enough to make a larger down payment to qualify for a better mortgage deal. 

That being said, low mortgage interest rates make 2022 a good time to purchase a home for those who can afford to do so and are looking to build equity and create intergenerational wealth while meeting their current and future housing needs.

What Is the Outlook for the Multi-Family Real Estate Market in 2022?

With many people, especially millennials, currently priced out of single-family home ownership and a short supply of rental units, rents are likely to continue to increase in 2022, by an estimated 7.1% over year-end 2021 levels. The demand for rental housing is strong and growing. One significant investment opportunity lies in the demand for senior housing options that support independent living in locations where goods and services can be accessed via transport or walking. 

The prospect of higher rents, low inventory, and continued price appreciation bodes well for those considering an investment in the commercial real estate market, particularly in multi-family housing. In 2022, investors should see improved total returns from the combination of higher distributions of rental income and proceeds from the eventual sale of the property. CBRE predicts that total investment in multifamily properties will increase from $213 billion in 2021 to $234 billion in 2022 and forecasts an 8% increase in the net operating income from multifamily properties by the end of the year.

Takeaways

Nobody is suggesting that the seller’s market of recent years is about to become a buyer’s market. All the key factors shaping residential real estate continue to trend in favor of sellers—high demand, low inventory, increasing home prices, and low mortgage interest rates. That is just as true for multi-family properties as for single family homes. However, the rate of change is expected to slow, making the superheated housing market of the past couple of years a little friendlier for prospective buyers. 

Bear in mind that projections, predictions, and forecasts, while they may be empirically based, also involve a certain amount of interpretation, and are based on assumptions that may not always hold true. There can be a significant margin of error and wide variation in the opinions and conclusions of equally experienced and authoritative experts, making it unwise to rely on a single source of information. There is a lot to consider in deciding when the time is right to buy or sell a home, or whether you should look at other housing or investment options. As far as predictions for the housing market in 2022 go, keep that word “normalization” in mind. We may not be back to “normal,” if there is such a thing, but the 2022 housing landscape should look a little more familiar.

Kent Ritter is an experienced multifamily investor and entrepreneur empowering you to build real wealth through real estate syndication. Learn More.