What Might the U.S. Real Estate Market Look Like in 2022?

I know, I know. We’re barely into the spring, and here we are talking about what the housing market might be like in 2022. Bear with me. There’s a method to the madness.

Right now, housing market inventory is still woefully low in many cities across the country, while competition remains high. As a result, a lot of would-be home buyers are considering postponing their purchases until next year. The idea is that home-buying conditions might improve in the near future, compared to how things are right now.

This leaves a lot of folks wondering: What will the U.S. real estate market look like in 2022?

There’s a lot we don’t know about future housing conditions, and a lot of variables that could change between now and then. (Just look at all of the curveballs life threw at us during 2020!) But what we can do is examine current housing-related trends and offer a bit of data-based speculation.

With that in mind, here’s what we think the real estate market will be like in 2022.

What the Real Estate Market Could Be Like in 2022

Higher mortgage rates. Higher home prices. Lingering inventory problems. Those are just a few of the trends we expect to see within the U.S. housing market in 2022. Here’s a closer look at these and other factors that could shape the real estate scene next year.

1. Less demand from home buyers.

Last year (2020) was a big one for the nation’s real estate market. Home buyer demand surged, despite a global pandemic and economic slowdown. Record-low mortgage rates contributed to this, along with a newfound appreciation for homeownership.

Demand among buyers remains strong today, as we move into the spring of 2021. But what about next year? What will the real estate market look like in 2022, from a demand perspective?

We expect to see less demand among home buyers in 2022, and for a number of reasons.

For one thing, mortgage rates are widely expected to be higher next year than they are right now. (See point #2 below.) One forecast predicted that the average rate for a 30-year fixed home loan could climb to 3.6% by the end of this year. That’s quite a bit higher than where we are right now, in late March, with rates averaging around 3.0%.

If borrowing costs do creep upward over the coming months, as predicted, it will likely have a dampening effect on home-buyer demand. So that’s one way the real estate market might change in 2022. There could be less demand from buyers and therefore fewer sales, when compared to 2020 and early 2021.

2. Higher mortgage rates are likely.

A recently issued forecast from the Mortgage Bankers Association predicted that mortgage rates will be higher in 2022 than they are right now. And they might be substantially higher than the record low we saw during the first week of January 2021.

At the start of this year, the average rate for a 30-year fixed mortgage loan dropped to an astoundingly low 2.65%. That was the lowest weekly average in 50 years of record-keeping, a noteworthy event to say the least. This partly accounts for the soaring demand among home buyers, during the latter half of 2020 and into 2021.

On March 18, 2021, the research team at Freddie Mac wrote: “As expected, mortgage rates continued to inch up but are still hovering around three percent, keeping interested buyers in the market.”

Going forward, a rise in rates could cool the red-hot housing market. If borrowing costs climb over the coming months, we could see a drop in demand from home buyers. This is another key factor that could affect the real estate market in 2022. And when you add in the prospect of steadily rising home values, the cooling effect could be even greater.

So let’s talk about home values next.

3. Home prices will keep rising, possibly at a slower pace.

It’s hard to believe that home prices in the U.S. rose steadily throughout 2020, despite the economic wreckage caused by the coronavirus pandemic. But that’s exactly what happened. House values in most U.S. cities crept upward throughout last year and into 2021.

US home values through March 2021
Chart: Median house prices in the U.S. | Source: Zillow.com

According to the real estate data company Zillow, the median home value in the U.S. rose by around 10% over the past year or so. (That’s from March 2020 to March 2021, roughly.) Some of the hottest housing markets, like Boise and Austin, have experienced even greater price growth over the past year or so.

Which begs the question: What will the real estate market be like in 2022, from a home-price perspective?

Based on current conditions, we expect to see continued price growth in most U.S. cities during 2022. But we probably won’t see the tremendous gains that have been recorded over the past 12 to 18 months.

Many housing markets across the country are becoming unaffordable for an ever-growing number of residents. This could have a cooling effect in the future, as we’ve seen many times in the past. When fewer and fewer residents can afford to buy a home in a particular area, it reduces demand. This in turn can slow home-price growth.

But despite a potential slowdown in price growth, house values will likely continue rising to some degree in most local housing markets. As a result, a strong argument could be made for buying a home sooner rather than later. Those who postpone their purchases until later in 2021, or push it into 2022, could encounter higher prices and mortgage rates.

4. Inventory will remain a challenge in most cities.

Housing supply shortages have generated countless headlines over the past couple of years. This trend could present challenges next year as well. In fact, supply constraints could be one of the most important factors to shape the U.S. real estate market in 2022.

According to a recent housing market report by Realtor.com, inventory levels continue to drop across much of the U.S. They reported a 50% decline in the number of homes for sale in March 2021, compared to a year earlier. To state it differently: the nation’s housing market shrank by half in just one year’s time. That is a staggering reduction in the number of homes for sale, especially when you consider that inventory conditions were already tight a year ago.

To quote the March 2021 Realtor.com report:

“Total active inventory continues to decline, dropping 51% year-over-year in the week ended March 6. With buyers active in the market despite, or perhaps because of, the uptick in mortgage rates, homes are selling quickly and the total number actively available for sale at any point in time continues to decline.”

With luck, we could see a gradual rise in inventory as we move further into 2021. In some housing markets across the U.S., new construction could bring much-needed relief for prospective home buyers. Even so, it appears likely that supply constraints will continue to be a dominant issue for the U.S. real estate market well into 2022.

5. More housing markets will favor renting over buying.

As we reported in a previous story, a lot of housing markets across the country currently favor renting over buying. At least in terms of monthly costs.

Nationwide, rental prices have moved in two directions over the past year or so. In some of the hottest housing markets, where population growth is driving demand, rents have increased. In other cities, rents have declined significantly.

But overall, home-price appreciation has outpaced rental increases over the past year. This means that more and more housing markets are starting to favor renting over buying, for cost-conscious residents. This trend could continue into 2022 as well, especially if home values continue to climb steadily as expected. The bottom line here is that, in many U.S. cities, renting could become a more attractive option for local residents.

So there you have it, our “best guess” as to what the U.S. real estate market will look like in 2022. Home prices will probably continue to climb in most cities, though possibly at a slower pace. Mortgage rates could be higher next year than they are now. Renting could become more attractive in the months ahead. And most housing markets will continue to grapple with supply shortages.

In short, the U.S. housing market could continue to favor sellers over buyers for the foreseeable future.

Disclaimer: This article contains housing-related predictions that are based on current trends and conditions. Such projections are the equivalent of an educated guess and should be treated as such. No one can predict future economic or real estate trends with complete accuracy.