March 22, 2022

2022 State of the Housing Market

Many people are asking, "what’s the State of the Housing Market for 2022?".

First, let’s recap what happened in 2021:

Mortgage interest rates rose sharply through March of 2021, but recovered most of those loses by late summer. In housing, we had strong demand and tight supply, but COVID caused supply chain disruptions and labor shortages, which pushed up real estate values even more than most expected.

So, to figure out where we’re headed in 2022, I curated information from multiple sources.

First, let’s look at a mortgage forecast. Mortgages will be easier to qualify for than they were in 2021. Now, nothing’s as easy as it was in 2006, and that’s by design. But if you look at recent times, it’s easier today to qualify for a home loan than it was just 5 years ago. And as some of the COVID-related overlays are removed in 2022, it will get a little less stringent.

How about interest rate volatility. I checked in with Barry Habib at MBS Highway, and he said that the Federal Reserve, which controls short-term interest rates to manage inflation, will attempt to tame inflation by tapering mortgage backed security purchases through March, and they will likely begin hiking short term rates in May, for a total of three hikes in 2022 and about two or three in 2023.

This tapering and hiking will cause the stock market to pull back slightly. As a result, mortgage rates will go up as the short-term rates go up, but mortgage rates will then settle back down as inflation cools off. These mortgage rates will still be well below their long-term average.

How about housing? According to housing experts, Keeping Current Matters, they are expecting to see a strong winter and spring market. Normally, we see home sales take a break during the winter and pick up in the spring, but a lack of supply will continue to help homes sell quickly.

Now, demand may be slightly softer due to a rise in interest rates, but it will still be robust. History shows homes are only impacted slightly by rising mortgage rates. This is because most sellers would rather withdraw from the market than sell at lower prices, and that keeps supply tight. This is a phenomenon known as “downside sticky”.

So, supply will increase, but it will remain tight. A tight labor market, supply chain disruptions and the semiconductor shortage will all play a role in the tight supply.

Meanwhile, rents will continue to rise as they have been. Rents will continue to increase above 5% per year pushing many people to see the benefit in buying their home instead of renting.

All of these factors will result in housing enjoying a mid to high single-digit appreciation, while still providing a great wealth creation opportunity.

Overall, we’ll have a strong year, just not quite as strong as 2021.

And what about housing affordability? For this, many people rely on their gut, and when they do, they only look at the last few years for context. Instead, we have to do some math and look at a longer time period.

Many people may find this hard to believe, but it’s actually more affordable to purchase a home today than it was 20 years ago. Why? One of the main reasons is that interest rates today are so much lower than they were before.

The affordability index is defined as the ability of someone with the median income to purchase a median priced home. The higher the index, the more affordable that purchase. Even with home prices being higher, it’s still more affordable to purchase a home today than it was at any time in the 1990s or the 2000s.

Now some might say, “But home prices are going up at 10% and wages are only going up 4%”.

Remember, you’re not spending 100% of your income on your home payment. On average, homeowners spend about 33% of their income on their housing payment, so a home price increase of 10% only needs wages to grow at 3.3% to keep pace.

There are some wildcards that could change everything. There’s COVID - additional stimulus may fan the flames of inflation – and a runoff of the Fed’s balance sheet could push mortgage rates higher than previously thought.

Here’s the thing: We have to think about housing in the long-term. Think of it this way. If you’re playing with a yo-yo as you move up an escalator, and that yo-yo represents housing prices, there will be times when home prices rise and times when it will drop. But in the long term, home prices go up.

Even after the 2008 housing crash, home prices are significantly higher today than before 2008. And that’s where the long-term commitment in housing can make a difference in your financial structure. Housing is a long-term investment, and we want to help you build wealth through real estate.

If you would like to start – or continue building wealth in real estate, give us a call at (360)755-3689.

To watch our video on this topic, click here.