How Inventory Growth Could Shift the Housing Market in 2022

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Supply shortages have been the big real estate news story of the past year. Housing market inventory has hovered at record-low levels, partly due to a COVID-related surge in home buying activity.

But recent reports show an increase in the number of new listings hitting the real estate market.

If inventory growth continues over the coming months, it could shift the housing market later in 2022. We probably won’t see a classic buyer’s market anytime soon. But sustained inventory growth could make the real estate scene a bit more buyer-friendly in 2022.

Inventory Growth Brings Good News for Buyers

Last week, published an updated housing market report based on data from their property listing platform. Among other things, that report showed an increase in the number of new real estate listings coming onto the market in recent weeks.

This is the latest in a string of reports that have brought good news for home buyers across the U.S. If this inventory growth trend continues over the coming months (which seems likely), it could reshape the housing market in 2022.

According to the September report, new listings nationwide rose by 4.5% in August compared to a year earlier. That might not seem like a huge increase. But when you consider the severity of the housing supply shortage across the U.S., it becomes meaningful.

New listings rose even more within the nation’s 50 largest metro areas. The biggest gains were seen in Midwest cities like Cleveland and Columbus, Ohio, where new listings rose by more than 20% year over year.

Overall, however, housing market inventory remains tight in most U.S. cities. That’s why we’ve seen such tremendous price growth over the past year. According to Zillow, the U.S. median home value rose by 16.7% in the past 12 months.

Inventory growth appears to be most significant at the lower end of the pricing spectrum, where first-time home buyers often shop. The overall share of so-called “starter homes” has risen in past months.

To quote the report:

“Continuing last month’s trend, more new sellers added to the share of entry-level homes (+6.4%), defined as single-family homes in the 750-1,750 square foot range…”

How It Might Affect the Housing Market in 2022

Real estate market conditions are primarily driven by supply and demand — and the interplay between them. When one side of the equation changes significantly, it can create a kind of ripple effect.

The ongoing increase in new real estate listings could shift the housing market in 2022. It probably won’t be enough to “flip” it from a seller’s to a buyer’s market. But there could very well be some notable changes next year, especially if this trend continues.

Here are three ways inventory growth could affect the U.S. housing market in 2022:

1. Slower home-price growth going forward

Most, if not all, housing market forecasts for 2022 predict that home prices will rise more slowly next year. And after more than a year of overheated, unsustainable growth, that would be a welcome trend.

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In a forecast issued over the summer, researchers from Freddie Mac suggested this very scenario. They predicted that home values in the U.S. would rise by 12.1% in 2021, followed by a gain of 5.3% in 2022.

The ongoing rise in real estate listings could contribute to this cooling affect, by bringing a bit more balance to the market in 2022.

This is often referred to as the “law of supply and demand.” When the available supply of a particular product (like houses) starts to grow, it tends to slow price growth. If supply increases substantially relative to demand, it can even cause prices to level off or drop.

Granted, we probably won’t see a sustained decline in home values anytime soon. But we might see slower price growth in the housing market of 2022, compared to the past year’s gains.

Much will depend on supply trends going forward. The more inventory growth we see over the coming months, the more it could cool the real estate market in 2022.

2. Less heated competition among buyers

The latter half of 2020 and the first half of 2021 have been tough for home buyers. Due to record-low inventory, high demand and fast-rising prices, many frustrated buyers have backed out of the real estate scene altogether.

But what about next year? Will the housing market of 2022 be any easier on buyers?

If the recent trend toward inventory growth continues, home buyers could have an easier go of it next year. They might not have to compete so fiercely for limited supply. They might not have to waive their contract contingencies or offer more than the list price (common trends over the past 12 months).

In short, the real estate market of 2022 could be a bit more buyer-friendly.

3. More motivated and price-conscious sellers

For many months now, home sellers in the U.S. have pretty much had their way in terms of pricing and negotiations. They could pick a price out of the clear blue sky and have buyers lining up to pay it.

That now appears to be changing in some housing markets across the country. And inventory growth has a lot to do with it.

As the September report stated:

“August [2021] housing data shows early signs of sellers beginning to compete for buyers … As inventory and new listings continued to improve in August, the rate of sellers making price adjustments has begun to approach more normal levels.”

Key point: In the above quote, price “adjustments” refers to reductions. It seems that many sellers across the U.S. are now starting to lower their prices, partly in response to more homes coming onto the market.

If the number of homes for sale continues to rise over the coming months, it could influence selling strategies and overall market dynamics. In the real estate market of 2022, we might see more motivated sellers.