Will Home Prices Drop in 2022? Housing Authorities Share Their Forecasts

Homebuyers waiting for home prices to come down got a clear message from number-crunchers this week: Don’t expect home prices to drop in 2022. In fact, the market is likely headed for another year of double-digit price gains.

Economists at Goldman Sachs forecasted a 16% increase in home prices by the end of next year. Last month, Zillow predicted that home values will grow 11.7% from August 2021 to August 2022.

The forecasts suggest that the chronic housing shortage that has tilted the scale in favor of sellers will continue into next year, despite efforts by home builders to increase supply.

Meanwhile, the prospect of rising mortgage rates as the Federal Reserve begins tapering its purchase of mortgage-backed securities has the opposite effect. This downward pressure is likely staving off a repeat of the 20% home price gains the market saw in 2021.

Homebuying in an era of rising prices

The Zillow and Goldman Sachs home price forecasts change the calculus for homebuyers with the impression that they should wait out the hot market.

Another year of double-digit price gains coupled with higher interest rates will sideline more buyers in 2022. But the tail-end of 2021 presents an opportunity for homebuyers to lock in a low interest rate with the prospect of exceptional home appreciation in their first year of homeownership.

If Goldman Sachs 16% prediction is accurate, waiting a year would add $59,984 to the national median sales price.

Adding together projected home price and interest rate increases, the average 10%-down buyer might spend $364 more per month for the same house in 2022 compared to 2021.

It's unlikely home prices will drop in 2022, but homebuyers can turn what seems like dreadful news into an opportunity to buy a home that appreciates well above the rate of inflation.

What’s driving home price gains?

The current run-up in home prices is due largely to two things:

1. A chronic shortage of housing supply, due to a decade of underbuilding following the 2008 recession and pandemic supply chain issues, and
2. A surge in homebuying demand fueled by exceptionally low interest rates, pent-up pandemic savings, and increased migration

Housing authorities forecast a slight rise in mortgage rates next year, which may weigh down demand and, by extension, home prices.

However, inventory still has a long, rocky road to recovery. A six month’s supply of housing is considered balanced. In August, the U.S. had only 2.6 month’s worth of supply.

Supply chain issues and labor shortages are making homebuilding slower and more expensive. Until these issues improve, the imbalance of supply and demand is a recipe for price increases and a prolonged seller’s market.

Mortgage rate projections are not a reflection of Fairway’s opinion or guarantee of interest rates in the current or upcoming market.