Housing experts such as the National Association of REALTORS’ (NAR) Chief Economist Lawrence Yun believe that housing demand will continue throughout 2022 and that prices will rise between 4 and 6%. But certain factors could temper the pace of sales by approximately 3%, and that double-digit price increases, multiple offers, and offers over list price won’t be quite as prevalent as they were in 2021.

Does this mean we’re in a housing bubble?  Will there be a real estate crash? Or, is homebuying simply slowing down? For the answers, we need to look at economic growth. Among the many factors that are impacting the economy and therefore the housing market, are inflation, rising mortgage interest rates, overall housing affordability, the labor market, COVID and its variants, and the uncertainty created by the Russian invasion of Ukraine.

Inflation. According to Sam Khater, chief economist and head of Freddie Mac’s Economic and Housing Research division, inflation poses a risk to economic growth. In its January 2022 quarterly forecast, Freddie Mac reported that consumer price inflation (CPI) surged in 2021, hitting a 40-year high of 7.0% year-over-year in December 2021. Khater told Fox News that inflation is broadening beyond supply-constrained segments and is impacting consumer sentiment. Consumers will curtail spending to keep household costs under control.

Mortgage interest rates. With inflation at its highest level in four decades, the Fed is expected to enact an aggressive 50-basis-point increase to the short-term (overnight) borrowing rates to banks or federal funds rate, which will be the first in a series of hikes throughout 2023.  Banks will pass the increases along to consumers so home mortgage loans will be costlier, which could cause sales volume and price escalations in housing to slow down. Mortgage interest rates should be impacted to an annual average of 3.6% in 2022 and 3.9% in 2023, up from approximately 3% in 2021. Yun points out that a four percent average mortgage rate is not a drastic increase.  Freddie Mac expects housing price growth to decrease from 15.9% in 2021 to 6.2% in 2022.

Housing affordability. In mid-March 2022, NAR economists released their monthly Housing Affordability Index which showed that affordability declined in January. The median family income fell by 4.5% while the monthly mortgage payment increased 27.0%. Two reasons are to blame – the increase in the benchmark 30-year fixed mortgage rate to 3.51% compared to 2.79% in January 2021 and the stunning increase in the median existing-home sales price which rose 15.9% from a year ago. These increases caused the monthly mortgage payment to rise to $1,284 from $1,011, an increase of 22.5% year-over-year.

The indices show that a home is affordable when 25% of gross household income or less is devoted to the mortgage payment, or principal and interest. But there are other costs to homeownership – homeowner’s insurance, taxes, mortgage insurance and property maintenance. When housing costs take more than 30% of gross income, then it becomes a burden to pay. First-time homebuyers typically spent 25.6% of their household income on housing, so they had bigger problems with affordability than other homebuyers who could afford a 20% down payment and a monthly mortgage under 25% of income.

Labor. The labor market that was so impacted by the pandemic is still recovering. While the unemployment rate reached 3.9% in December 2021, only 199,000 nonfarm payroll jobs were added. Job openings remained high at 10.6 million and nonfarm payrolls remain down approximately 3.6 million from the pre-pandemic levels.

COVID. In his State of the Union address this month, President Joe Biden urged Americans to go back to work in their offices and to send their children back to school, measures which showed optimism that the worst of the pandemic is over. While new variants continue to develop, the severity of the infection is lessening. Many people have contracted some form of COVID multiple times, yet the nation remains torn about safety measures. Only 65% of the U.S. is fully vaccinated, and even fewer people have gotten booster shots, despite widespread availability. The vaccines don’t prevent infection and they only work for a 3 to 6-month period to make symptoms less deadly or severe. While infections and deaths are declining and mask regulations have eased this winter, the population is still feeling the lingering impacts of small business closures, teacher and daycare shortages, and other economic side effects.  When flu season begins again in just a few months, so will COVID infections, which will challenge families, schools, and businesses and their ability to cope.

Russia’s invasion of the Ukraine. According to NAR’s 2021 International Transactions in U.S. Residential Real Estate Report, only approximately 1.8% of total home purchases were made by foreign homebuyers. Russian buyers account for less than 1% of foreign buyers. Economists believe escalating geopolitical tensions will cause investors to reallocate their portfolios toward U.S. Treasuries, which will bring down interest rates. However, as the leading supplier of oil in the world, Russia could cause oil prices to remain above the $100/barrel level, which will deepen inflation and cause more interest rate adjustments as risks to the U.S. housing market.  However, oil-producing states such as Texas, North Dakota, New Mexico, Oklahoma, Colorado, Alaska and Wyoming will increase global supplies which should spur more employment, demand for housing, and home prices in those areas. 

On the positive side, experts believe that more housing will become available. First, homebuyers are burning out. Tired of escalating home prices and insufficient supplies of homes, and competing with cash offers and over list price offers, some have dropped out of the market. Second, more homeowners, believing that home prices have hit their zenith, will put their homes on the market, which will increase supply. Affluent homebuyers are about to be hit with rising fees on second and vacation homes, which along with rising interest rates should increase inventory. And homebuilders will take advantage of decreasing lumber prices and well-paid labor to increase production.

NAR advises homebuyers to widen their perimeters, get prequalified by a lender and to hire a qualified real estate professional to help them find a home.