Will home prices drop in 2022? (Podcast)

December 13, 2021 - 5 min read

2022 Home prices: More of the same?

If you’re eyeing a home purchase (or sale) in the coming year, then you’re probably wondering where prices are headed — especially with the hot market we’ve had recently.

As mortgage advisor Arjun Dhingra put it in a recent episode of The Mortgage Reports podcast, “It’s clear that this market has been anything but normal.”

According to Dhingra, we can likely expect 2022 to be more of the same. But why — and when might we expect prices to finally decline? Let’s take a look.

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Why 2022 will be another strong year for housing

According to the Federal Housing Finance Agency, home prices rose a whopping 18.5% between the third quarter of 2020 and the third quarter of 2021. And demand from buyers? That’s been just as strong.

Unfortunately, those housing trends aren’t likely to disappear in 2022.

As Dhingra succinctly puts it, “We are not likely going to see any price cuts or a big uptick in inventory next year. The market is just too hot and stable.”

That stability stems from a number of factors, Dhingra says, including confidence among homebuilders.

“We are not likely going to see any price cuts or a big uptick in inventory next year. The market is just too hot and stable.”

“That confidence has been reported consecutively month over month — this last quarter and the quarter previous,” Dhingra says. “And that just means that builders are going to remain confident in wanting to build homes and seeing the opportunity there — despite the shortages and the higher cost to build.”

The nation’s monthly housing supply is also healthy and moving quickly.

And, most importantly according to Dhingra, existing homeowners are in a very good place.

“Their rates are low, their equity is high, and their payments are very affordable,” he says. “Their FICO scores are also as high as they’ve been through any housing cycle in the United States economy’s history, so there just aren’t a lot of people that are in a rush to unload their home.”

What could turn home prices around?

The only thing that might cause the real estate market to weaken and home prices to drop would be what Dhingra calls a “shock to the economy.” This could come out in one of three ways:

1. A rise in mortgage rates

Mortgage rates have been low for much of the last two years. If that should change, though, it could cause buyers to pull back and home prices to reverse course due to dwindling demand.

“Mortgage rates have remained very, very low and attractive,” Dhingra says. “If we were to see mortgage rates trend above 4% next year, you could see a pullback in people wanting to get mortgages. This would also lead to builders pulling back and maybe not being as confident and bringing as many new homes to the market, which would also create a little bit of a lag in housing.”

2. Tighter mortgage lending standards

According to Dhingra, the last 10 years have seen some of the strictest mortgage qualifying criteria on the books. If, for some reason, those standards were to toughen — and loans get even harder to come by, that could cause a slowdown too.

This is a remote possibility that would likely only happen if the economy were to take a sharp downturn. For instance, at the beginning of the pandemic, many lenders tightened standards due to the uncertainty about buyers’ financial stability.

Luckily, Dhingra doesn’t expect that in 2022.

“I don’t see an increase in mortgage criteria as a real possibility next year,” Dhingra says. “But if it did, then that would definitely be a sign of things to reverse course.”

3. Big employment changes

Finally, the third possibility would be a major change in the employment market. Specifically, we would need to see major job losses hit the homeowner segment of the population — not just the renters.

“The majority of the job layoffs and losses that happened in the wake of COVID disproportionately affected renters,” Dhingra says. “So this was a major reason why you didn’t see a big glut of homes just suddenly come on the market.”

If homeowners were to get hit with rampant job losses, they may be forced to list their homes, which could result in more inventory and a tamp-down of today’s rising prices.

The wild card: Homes in forbearance

There’s one wild card in the current housing market: The fact that nearly 1 million homeowners are currently on mortgage forbearance plans.

Once those forbearance plans expire, homeowners will need to either resume payments (if they can) or sell their homes. Owners who have built up a stockpile of savings during their forbearance may also be looking to upsize or move to a new property, which could impact the market as well.

“We have just under a million homeowners that are left on forbearance,” Dhingra says. “What they do after forbearance remains to be seen.”

Buy now or wait for lower home prices?

With the housing market this hot — and prices on the rise — many buyers are wondering if they should put off a home purchase until things cool down.

Of course, the right timing always depends on your personal situation. If none of the current homes in your area meet your needs, or your finances could use a little work, then it might make sense to wait.

But if you’re only waiting on lower prices, it’s probably not the best idea.

Even in a best-case scenario, home prices won’t start falling in 2022. It’s far more likely that the current pace of inflation will simply slow down. So if you wait, you won’t be looking at lower prices — just prices that aren’t rising as quickly.

Keep in mind that home values have been on a general upward trend for decades. The only times they’ve fallen significantly have been in periods of extreme financial hardship (like the 2008 financial crisis).

As Dhingra said, barring a major shock to the economy, current home prices aren’t going anywhere but up.

So if you’re financially ready to buy, and you can find a home you like, now’s as good a time as any.

Stay tuned

Housing is shaping up to be strong in 2022, but nothing’s set in stone. Make sure and subscribe to The Mortgage Reports podcast to stay up to date on the market’s latest happenings as we head into the new year.

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Aly J. Yale
Authored By: Aly J. Yale
The Mortgage Reports contributor
Aly J. Yale is a mortgage and real estate writer based in Houston who has contributed to Forbes and worked for organizations such as The Dallas Morning News, PBS, NBC, and Radio Disney.