No One Saw It Coming: How a Housing Market Curveball Has Completely Changed What Buyers Can Expect in 2022

A lot can change in just six months. Russia invaded Ukraine. The latest season of “Stranger Things” dropped on Netflix. And the housing market, which received a turbo boost from the COVID-19 pandemic, has begun to shift.

Surging mortgage interest rates are rippling through the housing market, threatening to upend real estate’s unprecedented tear. These changes led the® economic research team to revisit its 2022 housing forecast, issued in December, and make some adjustments. The updated midyear forecast factors in these higher rates—and the disruptions they’ve already begun to cause. expects home prices and mortgage rates will continue to rise, home sales will drop as buyers are priced out of homeownership, and the housing market will continue to cool. However, in a bright spot for frustrated homebuyers, the number of homes on the market is expected to shoot up.

“The number of homes for sale right now is so low that it’s creating these ultracompetitive conditions for buyers, which are so challenging,” says Chief Economist Danielle Hale. “More homes for sale will help bring back more balance and sanity to the market.”

Mortgage rates are now anticipated to hit 5.5% by the end of the year—a rate expected to continue sidelining buyers already grappling with record-high home prices. Initially, the economists predicted they would hit only 3.6% for 30-year fixed-rate loans. However, rates hit a high of 5.3% last month before settling in at around 5.1%, according to Freddie Mac data.

A median-priced home of $447,000 with a 3.6% mortgage rate would command a roughly $1,626 monthly mortgage payment. (This is for buyers who put down 20% and doesn’t include property taxes or home insurance.) Boosting the mortgage rate to 5.5% translates into buyers paying about $400 more a month—nearly $5,000 more a year, and roughly $45,000 over the 30-year life of their loans.

Buyers have descended onto the housing market, scrambling to win bidding wars before rates surge even higher. The economists believe prices will be 6.6% higher by year’s end. While that’s still a conservative estimate given the recent spike in home prices, which rose 17.6% year over year in May, the rise is more than double the 2.9% appreciation economists had foreseen in their original forecast.

“Our home price projection is going up as we’re seeing a lot of sticking power in prices and price growth,” says Hale. “We do still expect home prices to cool, but we’re starting at a higher price point.”

Those budget-busting rates and prices are expected to slow home sales. Instead of the number of home purchases ticking up, the economists now predict sales will drop 6.7% compared with last year. (These are for existing homes instead of newly constructed ones.)

However, no one should panic. Even if sales do fall, the real estate market is still on track for a historically good year. Last year was an anomaly with the highest number of closings since 2007. Plus, fewer sales could give inventory levels a boost in a win for buyers who aren’t finding many properties for sale.

“Were it not for last year’s extraordinary sales numbers, this would be a very good year,” says Hale. “We’re a long way from a crash.”

In some welcome news for buyers, all of these forces at play are expected to give the number of homes for sale a big boost. Inventory is expected to increase by 15% this year. That’s a game changer for the market and is a significant jump from an earlier estimate of just a 0.3% bump.

Construction of those badly needed new homes is expected to remain 5% higher than last year. That’s because builders have found ways to overcome a myriad of challenges, from supply chain woes making it difficult—and expensive—to source materials and appliances to construction worker shortages.

The economists now expect housing starts, which is construction that’s begun on new homes, to hit a 16-year high this year.

“We have a really big building deficit to climb out of. Over the last decade, we haven’t built enough homes,” says Hale. “So we’ve got a long way to go to catch up. That’s why we could still see construction increase even if home sales slow.”

Home sellers will also likely need to adjust their expectations as they may not receive the windfall they expected. The bidding wars they expected, offers of tens of thousands of dollars over their asking prices, and legions of buyers willing to waive just about every contingency might not materialize. While it’s expected to remain a seller’s market, buyers are now struggling with higher prices and mortgage rates. So they might have less money to put toward a home than they would have just a year earlier.

“The market is going through a transition,” says Hale. “The housing market over the last few years has continued to grow more and more competitive. [Now] it’s going to feel a little like whiplash. The market is still competitive, but the tide is shifting.”

By Clare Trapasso

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