Spring 2021 was marked by record-breaking home buyer demand. With bargain-basement mortgage rates, bottomed-out inventory, and a pandemic to boot, Americans bought homes in droves. Competition was stiff, bidding wars became the norm, and, at one point in 2021, new-home sales even neared their highest point in over a decade.
But the times, they are a-changin’, and that breakneck demand can’t last forever—or can it?
According to Ali Wolf, chief economist at BUILDER parent company Zonda, the seller’s market will most likely persist well into spring 2022, giving builders and homeowners the upper hand in most housing markets.
Will these be the high-stakes markets we’ve seen across the past two years, though? Most experts say probably not.
“Given the level of home price growth, sellers should expect buyers to be more discerning compared with 2021’s spring season,” Wolf says. “In 2021, buyer desperation fueled a frenzy of activity, including campouts, bidding wars, and homes selling within hours of being listed. Some of the same activity may return for the most desirable homes, but the market should be healthier in 2022 compared with 2021.”
A Moderating Market
There are a lot of reasons for this “healthier” market, but mortgage rates top the list. With the Federal Reserve’s move to taper bond purchases and potentially raise the federal funds rate this year, an increase in mortgage rates is likely in the cards.
Though economists vary widely on just how high those rates might go (anywhere from 3.2% to 4% on 30-year loans, by most accounts), they largely agree that rates will rise at least slightly across 2022.
“Mortgage rates should gradually rise in the coming year,” says Frank Nothaft, chief economist at property data firm CoreLogic. “We expect mortgage rates to average about one-half of a percentage point higher in 2022 than they were in 2021.”
According to Nothaft, that half-point rate jump will eat into consumer buying power and cause a slight pullback from house hunters—at least compared with last year.
As he puts it, “In the coming months, we expect to see a moderation in buyer demand as the erosion in buyer affordability takes a toll.”
The Impact of Inventory
Another factor that could slow buyers down is increasing inventory. In 2020, housing inventory hit all-time lows. Since then, it’s improved slightly, and most expect those improvements to continue through 2022. According to a recent survey from Realtor.com, more than one-quarter of homeowners plan to list their homes within the next year. Couple that with increasing construction, and this likely means more options for buyers and a less frenzied market on the whole.
“We expect additional for-sale inventory to come on the market,” Nothaft says. “With a little less demand and a little more supply, we expect homes listed for sale will be on the market a bit longer with fewer competing bidders, which should moderate home price growth.”
Still, housing supply is years away from meeting demand. The NAHB estimates the market is about 1 million homes short; however, Freddie Mac estimates the deficit is around 4 million.
That bodes well for builders, particularly as millennials hit their prime home buying years. According to the National Association of Realtors, millennials have made up the bulk of first-time home buyers for the past several years and 37% of all buyers in general. Demand from this cohort should remain healthy for years to come.
Another good sign for builders? Millennials largely prefer newer, more move-in ready homes.
According to NAR’s Generational Trends Report, 13% of buyers aged 31 to 40 bought new construction in 2021, and 9% of those aged 22 to 30 did. Even better? A study by home buying platform Bungalo shows a whopping 76% of millennials want a move-in ready property.
Where Will Prices Go?
As demand softens, home prices are projected to moderate, too. The Federal Housing Finance Agency noted a 19%-plus gain in home prices at one point in 2021. Across 2022, experts have predicted anywhere from a 2% to 7% bump—less than half that increase at most.
Still, that doesn’t mean prices will drop.
“Home price growth will slow,” says Robert Dietz, chief economist and senior vice president for economics and housing policy at NAHB. “We are not forecasting price declines in 2022 on a national level, but the pace of price growth will slow closer to the rate of inflation as some buyers are priced out of the market.”
Case in point: In 2021, the typical new home cost just over $403,000, according to the Mortgage Bankers Association. The group projects those prices will rise to $410,000 by the end of 2022’s first quarter.
A Seller’s Market, But Slower
Looking ahead, spring should be a successful season for home builders. As Dietz puts it, “Home construction will remain strong as we move into 2022. Builder confidence is steady.”
All in all, Dietz projects 1.1 million single-family construction starts this year—about a 25% gain over 2019 levels. Of course, rising builder costs, supply shortages, and other continued headwinds could throw a kink in that projection.
“While the new year is anticipated to bring a healthier housing market, building constraints are unlikely to significantly improve,” Wolf says. “The pervasive labor shortage, ongoing construction delays, rising material costs, and dearth of vacant developed lots are expected to follow us into the new year.”
According to Dietz, these challenges will likely call for more creativity on the part of builders. This might include doing more off-site construction, focusing on build-to-rent properties or townhomes, or using new framing techniques, like 3D printing.
As he explains, “NAHB is forecasting that 2022 will see gains in a number of innovative trends as the market attempts to deal with strong demographic demand but growing cost concerns.”