What Experts Say About the Housing Market

It's no secret that the housing market has been ablaze since the pandemic hit. Whether it was to secure a private outdoor refuge, expand home-office space or take advantage of record-low interest rates, Americans started buying real estate, and homeownership rates boomed. The U.S. housing market gained ​$6.9 trillion​ in 2021, the largest gain in a single year, according to Zillow.

Nearly two million renters in metro areas who were previously unable to buy due to high home prices in their area were now able to become home buyers.

As long as their jobs held out during the pandemic, many millennials of home-buying age could now seek real estate further out in the suburbs, thanks to remote work. Without a work commute, prospective home buyers were able to go where housing prices fit their budgets.

The increasing demand for real estate over the past 18 months has drained the housing inventory and, in many cases, created bidding wars for homes. Zillow reported December 2021 inventory as down ​40 percent​ from the pre-pandemic levels.

Low inventory and high demand drove up housing prices across the country. Low inventory meant greater demand for new construction homes. Then came the supply chain issues and labor shortages of 2021, which slowed down the delivery of construction materials.

And that is how America entered 2022 with a housing shortage. So, what's ahead, according to experts?

Interest rates are definitely expected to rise from last year's lows, but not dramatically, quickly or all at once.

The Federal Reserve (the Fed) recently indicated plans to raise the interest rate in 2022 to help counterbalance inflation. According to Jerome Powell, U.S. central bank chief, the Fed is beginning to gradually shift its focus from offering economic assistance toward fighting pandemic-induced inflation, which hit ​7 percent​ in January. Three separate raises are expected before the year's end.

Americans can expect interest rates to go up, which will put an end to low mortgage rates. While the Fed doesn't set mortgage rates directly, it executes national monetary policy that sets the tone for lenders to raise borrowing rates.

However, mortgage rates, even if they rise, will be comparatively lower than in years past, especially in the first half of the year. The mortgage rate alone may not price home buyers out of the market.

For instance, if after a down payment, you are borrowing ​$300,000​ from a lender with a 30-year fixed interest loan, if your interest rate increases from 3.1 percent to 3.5 percent, the mortgage calculator tool on realtor.com estimates an increase of $66 to your monthly mortgage payment. That may still keep the home within your budget.

​Consider also​: Pros & Cons of Low Interest Rates

In 2021, home price appreciation went up ​19 percent.​ Add to that the effect of inflation on nearly everything Americans buy, and the affordability of homeownership takes a hit. On the flip side, those who already own homes experienced an increase in home value. These sellers and their real estate agents quickly learned they could raise their asking price.

As demand continues to increase and inventory decreases, sellers retain the advantage. Realtor.com expects the median home sales price to increase by nearly ​3 percent​ in 2022.

Renters who are hoping to become homeowners in 2022 will have an additional challenge to deal with: rising rents. Rents are expected to grow ​7.1 percent​ in 2022, more than double the projected rise in home prices. That is on top of the national average rental increase of ​10.1 percent​ in 2021. The annual expected rent increase is typically ​2 percent.​

In short, with rent, housing prices and interest rates all on the rise in 2022, it will cost potential buyers more as they wait for the right home to become available.

If you are in the market for a new home in the next year, consider checking an affordability calculator like the one on Redfin.com.

With more than ​40 percent​ of potential sellers admitting they will price their house above what it is worth, don't expect your first offer to be accepted unless it's over the asking price.

Note that ​44 percent​ of sellers expect you might be willing to forgo an inspection or appraisal during the course of the deal (not recommended, by the way).

With the low inventory of existing homes, competition will continue to be fierce for buyers. The National Association of Realtors (NAR) put existing home inventory supply at ​1.8 months​, meaning the number of homes on the market will sell out in that amount of time if sales continue at the same pace.

The seller's market will continue in 2022.

​Consider also​: 5 Reasons You Need a Home Inspection

Realtor.com predicts a turnaround in for-sale inventory in 2022. According to a survey in fall 2021, the number of homeowners planning to sell their home in the next 12 months more than doubled, moving from 10 percent to ​26 percent.​

Of those planning to sell, ​93 percent​ took steps to prepare for selling. In every age group of potential sellers, more than 30 percent of buyers report being motivated by the potential to make a profit in the current housing market. (Read: Expect prices to be high).

Experts from the NAR, Redfin, Zillow and Realtor.com all predict an improved state for inventory in 2022, as well as a more balanced housing market. While estimates of just how much inventory will go up varies among sources, most cite an increase in new construction helping to open up houses that haven't made it to market yet.

And unfortunately, Americans protected from foreclosure by the pandemic forbearance extensions will have to resume mortgage payment or sell their home in 2022.

NAR's chief economist, Lawrence Yun, predicts, "With more housing inventory to hit the market, the intense multiple offers will start to ease."

As existing home inventory dwindled, monthly new home sales were up by ​11.9 percent​ in December 2021. The U.S. Census Bureau puts new home inventory supply at ​six months​ if buyer activity continues at the same rate.

Between August 2020 and August 2021, the number of permits for new, single-family construction reached ​1,687,300​, more than 316,000 above the annual average in the relatively stable 40-year period before the housing bubble of the Great Recession rocked the real estate market in the early 2000s.

With the high demand for new construction and the rising cost of materials and construction, new home costs will increase in 2022 as well. In the third quarter of 2021, home price appreciation went up ​19 percent.​

If supply chain issues and labor shortages are improved, and the cost of house materials remains steady or decreases, home builders will be able to pick up construction.

While purchasing a single-family home may continue to be a challenge in 2022 for first-time homebuyers and experienced buyers alike, real estate experts predict normalization entering the scene by the year's end.

Potential buyers should approach the search knowing that it's a competitive seller's market. Median home price, mortgage rates and, therefore, mortgage payments will continue to rise in 2022, although housing experts feel that will taper off.

For those looking to refinance in 2022, today's low interest rates may provide an incentive. However, when considering a refinance, consult with your lender and check out the available resources on consumerfinance.gov to ensure your new loan works to your advantage and aligns with your financial goals.

​Consider also​: 3 Simple Numbers to Help You Buy a Home