Housing market forecasts don’t provide any guarantees as to what the future holds for real estate, but experienced analysts make predictions that can be used to help with buying decisions. Ramsey Solutions posts that this information shouldn’t completely control what you decide to do; final decisions should be based more on your finances and personal situation. But still, knowing things like how an impending interest rate increase could turn things around will help you stay more informed and guide your thought processes. So what’s in store for the market, according to the experts?
The Post-Pandemic Rebound and Interest Rates
Once the U.S. entered into its post-pandemic rebound, the housing market literally exploded and properties were selling like crazy. During the last four months of 2021, homes sales rose in September, October and November, dropping slightly in December during the holidays. This high demand led to skyrocketing prices and eventually, lower inventories. In 2021, the average home price was up to $347,000; this was $50,000+ more than 2020.
Low interest rates fueled the surge in demand and high prices. In 2021, they were at an all-time low, ranging from 2.74 to 3.10 percent for a 30-year fixed mortgage and 2.15 to 2.39 percent for 15-year fixed. These rates had already started increasing in early 2022, as they are strongly influenced by inflation and the economy. The prime rate was increased to 4% on May 4, 2022, but according to the New York Times, mortgage rates follow the yield on 10-year Treasury bonds. This in turn is influenced by how investors think the Fed will react to inflation, amongst other things.
There will likely be more interest rate hikes, which could increase mortgage interest numbers further down the line. Even if they do, they’ll still be considered as low when you compare them to historical standards. The interest rates for adjustable-rate mortgages and home equity lines of credit may also rise up higher in the coming months and years.
Buying a Home in 2022
Many believe that the strong seller’s market will continue well into 2022. Time posts that it will continue to be this way for the foreseeable future, but it shouldn’t be as unprecedented as 2021. The chances of having bidding wars and selling way over listing price should go down somewhat. Keeping that in mind, some markets and sub-markets will be stronger or weaker than others. And if you need do get upgrades or repairs done, the supply and labor shortage could make the wait times much longer − plan well ahead for this.
The buying and selling boom led to a low housing inventory, so it may still be difficult to find the right house for a long time. Prices are expected to keep rising, but the pace won’t be as fast as in 2021.There may still be bidding wars but fortunately for buyers, they shouldn’t be as intense. Last year it was common to see appraisal contingencies waved and all-cash offers, but going forward sellers might not have the opportunities to drive up offers and be so selective.
Will There be Housing Crash?
Not according to what the experts are saying. Norada Real Estate Investments claims that prices rose because of a supply and demand gap, and that the market is in better shape now than it was 10 years ago. They add that the influx of millions of millennial home-buyers and renters plus chronic underbuilding led to the buying surge; the fact that so many people wanted to move out of cities and into suburbs and other less-crowded areas (because of the pandemic) added fuel to the fire.
During the 2021 boom, the largest annual gain was for single-family home rentals and values; the U.S. also experienced the highest number of home sales in the past 15 years and historically low foreclosure rates. So even though mortgage rates are heading up, the still-present inventory shortage means that prices won’t be going down substantially anytime soon; the likelier consequences are slowly-climbing prices and slower rates of appreciation.
How Will the Housing Market Play Out in the Future?
The rise in mortgage rates is definitely turning away homebuyers, and sellers are also shying away from taking the plunge for the same reason. As demand and supply decrease, it’s not likely that the field will change into a buyer’s market in the coming months. The higher rates may allow inventory to build up again but since it’s so low at this point, it will take a long time to recover.
Again, since the supply was depleted, home prices will still continue to rise but at a slower pace. This combined with higher mortgage rates will lead to fewer qualified buyers. Yet the interest rates are still low; demand could remain steady throughout the spring and summer. Much also depends on the part of the country; the top-tier real estate markets are still showing ongoing and significant price increases. Over the past year, Phoenix led the pack with a 30.4% average price increase, followed by Las Vegas at 26.5% and San Diego at 25.2%; Miami was also high, at 19.5%.
Are Some Homes Overvalued?
Fortune points out that the gap between home prices and incomes cannot outpace each other for too long; higher or lower incomes “pour over into housing.” Income levels have not risen in the same way as housing prices have over the past year; even though unemployment is down, private sector wages are up 4.8% and U.S. home prices are up by 19.8%. Now, the average household has to spend 32 percent of its monthly net income to make their mortgage payments on an average-priced U.S. home.
To further understand the current housing affordability situation, Fortune shared information from three regional home price assessments provided by the Real Estate Initiative at Florida Atlantic University, CoreLogic and Moody’s Analytics. It was found that 65% of U.S. housing markets are overvalued, 26% are normally priced and 9% are undervalued. When a market is overvalued, the prices for homes are above what the local incomes are able to support. And to make things worse, the median 30-year fixed mortgage rate jumped from 3.92% to 5.3% recently.
But even with all of the overvaluation, these experts feel that a home price correction won’t happen anytime soon. Overvalued often means overpriced and in 2021, buyers were committing to purchase prices that were often substantially inflated after bidding wars. Florida Atlantic University found that 100% of the country’s biggest housing markets are overpriced and out of those, 44% were overpriced by 30% or more. According to their research, the worst ones were Boise, Austin, Ogden, Utah, Las Vegas and Atlanta. Compare those figures to two years ago, when their data showed that 0% of housing markets came in as overpriced by 30% or more.
The historic overvaluation and high prices should be cooled off by the higher mortgage rates; other industry leaders feel that home prices will be flat in the coming years. The more overpriced markets might see price drops from around 5 to 10%, but as things are slowing down the choice of waiting or jumping to buy, sell or invest is a complicated one that requires careful thought and research.