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2022 Housing Market Predictions

Katie Jensen
Dec 23, 2021
Mortgage Forecast

The Fed has clearly indicated that interest rates will continue to rise, causing mortgage professionals around the country groan in despair, but should they? 

KEY TAKEAWAYS
  • House price appreciation will remain high in 2022.
  • Prices are not expected to come down from the extremes they reached in the past year.
  • Mortgage professionals need to be problem solvers for their clients and Non-QM needs to be part of their solution set.

Although fourth quarter numbers have yet to come out, it’s safe to say that 2021 was another outstanding year for the housing market. Interest rates remain near historic lows despite the incremental increases this past fall. The year also brought record-low foreclosure rates, and the highest number of home sales, according to Zillow’s records. 

Still, concerns are mounting as the country struggles to recover from the COVID-19 pandemic, with new strains of the virus appearing and hindering our economic progress thus far. Supply disruptions and constraints are expected to continue well into next year, causing home prices to remain elevated, and demand is not expected to drop off until… Well, who knows when? 

Don’t take it from me, though; take it from our industry experts from some of the most reputable companies in the game: LoanStream Mortgage, RCN Capital, and First American Financial.

Tough Year For Buyers

As supply continues to dwindle and demand remains elevated, or in some places, growing even higher, sellers will continue to benefit from the housing frenzy well into next year. 

“At first glance, the outlook for the 2022 housing market is a familiar one – strong millennial demand for homes constrained by an ongoing, historic housing supply shortage. This supply-demand imbalance generated the record house price appreciation seen in 2021 and, given this dynamic shows few signs of changing, we expect house price appreciation to remain high in 2022,” said First American deputy chief economist Odetta Kushi. 

But, home prices will need to level off eventually, won’t they?

Erica LaCentra, chief marketing officer for RCN Capital, said: “2022 is probably still going to be a tough year for buyers. While home prices aren’t expected to climb in the coming year as rapidly as they did in 2021, prices are not expected to come down from the extremes they reached in the past year due to limited inventory and intense buyer demand.”

“Home prices will likely begin to level out to a point where buyers will no longer see prices jumping up as rapidly so there will at least be slightly more consistency,” LaCentra continued. “However, with prices still remaining high and mortgage rates starting to rise, affordability will be a significant challenge and buyers will continue to face difficulties in a highly competitive market.”

Extraordinarily high prices and increasing mortgage rates should cause demand to drop off, shouldn’t it? With the proliferation of remote work and relocation, perhaps not. 

“Appreciation and demand, coupled with low rates have created an environment where home prices have increased substantially over the past years,” said Thomas Shaw, chief marketing and technology officer for LoanStream Mortgage. “Along with remote work and relocation, more markets have seen significant demand for housing and appreciation increases. Increased rates may place downward pressure on home price appreciation, however housing demand may keep appreciation steady and prevent falling appreciation.” 

Shaw points out that unconventional loans, mainly non-QM, will become more popular as rates increase and refinance business dries out. “Mortgage programs such as Non-QM will take the opportunity to step in and provide affordable loan programs for higher loan amount markets and opportunities for the borrower who may be just outside of the conventional box with 1099s, sizable assets, ITIN and foreign national borrowers,” he said. 

Aftermath Of The Refi Boom

The Fed has clearly indicated that interest rates will rise in an attempt to control inflation, causing mortgage professionals around the country groan in despair, but should they? 

In the first week of January 2021, the rate for a 30-year fixed-rate loan was at a low of 2.65%, according to Freddie Mac data. By the end of November 2021, rates were coming in at 3.10%, marking a 0.12% increase over the previous week. By the end of 2022, Redfin and Realtor.com are predicting mortgage rates to hit around 3.6% for a 20-year-fixed mortgage rate, “which ends up being substantial in the long run for an average homeowner,” LaCentra said. 

However, using the same facts, Kushi paints a more optimistic outlook, stating, “While mortgage rates are expected to increase in 2022, consensus still puts them below 4 percent, which is very low from a historical perspective. Continued wage growth will help boost household income, increasing house-buying power. Additionally, the untethering of workers from the office gives first-time home buyers the greater opportunity to move to less expensive areas.” 

Shaw, on the other hand, reminds us these increases in rates are merely estimates, though, mortgage professionals should prepare to diversify their loan portfolio. “Likely we will see mortgage rates follow upward in anticipation of these changes driven by the capital markets forward forecasts for MBS sales,” he said. “Mortgage professionals can no longer look to catch refinance opportunities out of thin air, they will need to be problem solvers for their clients and Non-QM needs to be part of their solution set.” 

The same goes for real estate investors looking to buy property within the next year. “For investors interested in single-family rentals, 2022 is going to be all about diversifying,” LaCentra said. “As we see rates fluctuate investors will want to make sure whatever they are buying they are able to lock in and they are sure it is a good decision long-term.” 

“As we’ve already seen over the past year or so, investors will do best moving out of major markets and focusing on single-family properties in more suburban areas. Cities like Youngstown, OH, Springhill, FL, Birmingham, AL, Cleveland, OH, Pueblo, CO and Buffalo, NY are all prime examples of cities that should be top of rental investor’s list. With lower to moderately priced homes, higher rates of appreciation, and low rental vacancy rates, these are the perfect places to purchase a property that will build long-term wealth,” LaCentra added. 

Although diversification and embracing non-QM seems like the only answer to this problem, it’s not. When business starts to dwindle, whether it’s due to market conditions or financing, that’s the time for mortgage professionals to get clever. 

“Higher loan amounts for Government and conventional loans can be a tremendous asset in that they now provide better opportunities for borrowers to access GSE programs without having to move into specialized programs such as Jumbo or Non-QM,” Shaw said. “These now open new markets and customers for mortgage professionals to examine and market to for refinance, cash-out and purchase options.

“Touching on Cash-out,” Shaw continued, “mortgage professionals and marketers will need to reassess models for cash-out, and monitor their data more frequently. While expanded market segments become available with higher loan limits, appreciation may have downward pressure. Setting expectations and knowing your markets will be important.”

Will Demand Keep Growing?

The pandemic reshuffling is expected to continue, according to our experts, though some believe the areas of migration will change as previously popular southern metro areas become more expensive. 

A recent Redfin report showed how some of these affordable southern metro areas are becoming more expensive as out-of-towners move in. Out-of-towners moving to Austin typically paid more for homes than locals ($23,000 on average), suggesting that sellers got a bigger bang for their buck when wealthy (and now remote workers) from San Francisco and New York moved into town. 

As a result, Redfin chief economist Daryl Fairweather predicts that the home price surge along the Sunbelt will eventually cause buyers to move into more affordable (rural) northern cities like Indianapolis, IN, Columbus, OH and Harrisburg, PA. 

“Research shows that even prior to the pandemic, there was a movement from larger metros to smaller ones, and from urban cores to suburbs and exurbs,” Kushi said. “The migration to smaller metros and suburbs is likely to continue because of millennials’ lifestyle choices as they continue to age into homeownership and the pandemic-driven acceleration of the untethering of workers from the office.”

“According to our third quarter First-Time Homebuyer Outlook Report cities such as Buffalo, Pittsburgh or Oklahoma City, offer first-time home buyers the most opportunities for homeownership because the median renter’s house-buying power in these cities allows first-time home buyers to consider a much greater selection of homes to buy,” Kushi continued. “You can’t buy what’s not for sale in your own market, but you can relocate.”

Kushi also acknowledges the struggle Millennial first-time-buyers will face heading into the new year, stating, “As they continue to age into their home-buying years in 2022, they will face a market with rapid house price appreciation, limited inventory, particularly in the lower price segment, and higher mortgage rates. Worse yet, first-time homebuyers don’t have the equity from the sale of an existing home to bring to the closing table. While the fundamentals support continued first-time home buyer demand in 2022, these buyers will face an uphill battle if housing supply remains near historic lows. You can’t buy what’s not for sale.”

On the investor side, LaCentra advises that southern cities are still ripe with opportunity, especially those looking to build long-term wealth. “For investors that are looking to make money by tackling inventory issues and building new homes, Southern cities such as Tampa and St. Petersburg, FL, Dallas, Ft. Worth, and Austin, TX, Atlanta, GA, and Raleigh, NC are ripe with development opportunities. Homes are in high demand in these areas of the country and still feasible compared to other parts of the country to be able to build and still turn a substantial profit even with supply chain issues that builders are facing.”

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