The combination of low mortgage rates, freedom to live wherever due to remote working, and the demographic surge of first-time Millennial buyers spurred the “perfect storm” of the 2021 housing market. Will the 2021 market’s record price growth continue in 2022?
2021 Housing Boom Losing Some Steam
We’ve already begun to see signs that the 2021 housing market’s record home price growth is slowing down. One of those signs is that seasonality, a cooling off period over holidays and vacation stretches, is emerging. Another is that homebuyers are beginning to push back against skyrocketing home prices. In April, 74.5% of all home sales saw bidding price wars while in October, “just” 60.3% of all sales saw bidding wars.
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Additionally, the Federal Reserve announced in November that it would gradually scale back its pandemic assistance relief programs and that it would gradually begin to raise interest rates going into 2022. This first week of December, the Federal Reserve Chair Jeremy Powell indicated the Fed would likely raise rates a bit more aggressively in order to curtail inflation. Higher interest rates would mean that some prospective homebuyers would be priced out of the housing market altogether.
No Consensus from 7 Industry Forecast Models about Home Price Growth in 2022
Some forecast models are predicting that price growth in 2022 will be one of the highest on record. Others are predicting that home price growth will be the slowest in more than 10 years.
Let’s look at the specifics of this uncertainty:
Zillow and Goldman Sachs share a bullish view of home price appreciation for the 2022 housing market. Zillow projects home prices will jump +13.6% between October 2021 and October 2022.
Goldman Sachs’ projection is even more bullish. Goldman Sachs is predicting a +16% uptick in home prices, or +13.5% on an annualized basis, between October 2021 and October 2022.
Neither Zillow nor Goldman Sachs foresees the wave of first-time Millennial buyers slacking off in 2022. In fact, these two prognosticators point to the reality that the country is in the midst of a five-year time frame (2019-2023) in which the five largest Millennial birth years (between 1989 and 1993) are already/will be hitting the prime first-time home buying age of 30. Both Zillow and Goldman Sachs forecast models suggest that there simply won’t be enough homes to satisfy this enormous first-time buyer demand in 2022.
On the other hand, four of the seven forecast models predict that home price growth will “fall back” to historical averages. Fannie Mae and Freddie Mac predict home price growth of 7.9% and 7%, respectively, in the beginning to mid 2022 and then drop to 3.4% by the end of 2022. Redfin and CoreLogic predict 2022 home price growth to drop down to 3% and 1.9%, respectively, while Redfin foresees the rate going back up to 3.6% by the end of 2022.
The Mortgage Bankers Association (MBA) is modestly bearish on home price growth. This industry trade group predicts that the median price of existing homes will decrease by 2.5% between Q4 2021 and Q4 2022. Why? Because the MBA foresees the average 30-year fixed mortgage rate going up to 4% by the end of 2022.
What Do Forecasts Mean for Mortgage Payments?
If a borrower shouldered a $500,000 mortgage at a 30-year fixed mortgage rate of 3.1%, they’d have a monthly payment of $2,135, not including taxes or insurance.
At a rate of 3.6%, the borrower’s monthly mortgage payment would be $2,273 or close to an additional $50,000 over the course of that 30-year mortgage.
If the mortgage rate hits 4% in 2022 as predicted by the MBA, that 30-year fixed mortgage would add $90,000 to that $500,000 house over the course of 30 years.
Even with the MBA’s forecast of 4% interest rates, US home prices would STILL be up more than +20% compared with pre-pandemic home price levels.
Thanks to Fortune.
