Learn what factors are at play that will influence real estate sales in the year ahead.
©Urupong - Getty Images
by Rose Morrison
The housing market is a complicated machine with close connections to the U.S. economy. Changes in one will affect the other, and vice versa. Because these two entities are connected so closely, even the slightest shift can have far-reaching implications for home buyers and real estate agents.
Looking for patterns and understanding the relationships between different economic factors can help real estate professionals anticipate where the housing market may go next. As the new year approaches, here’s what experts are saying.
The Housing Market Now
Coinciding with the pandemic in early 2020, supply chain shortages and underbuilding across the nation made it increasingly difficult for Americans to find new homes. Underbuilding has been a growing problem for years, as construction companies have faced more restrictions and obstacles on how they can build.
COVID-19 has compounded this issue and impacted spending and production. Building materials were bought up early in the pandemic as eager homeowners used their extra time for home renovations. Meanwhile, new products could not reach stores—either because they weren’t being produced or because of backups in the supply chain.
This lack of supply was exacerbated by a rise in demand for homes over 2020 and 2021. Many people changed their lifestyles and moved outside the city. Low supply and high demand created a strong seller's market, which led to higher prices. Even though houses cost more, bidding wars broke out as buyers tried to secure a residence.
High competition meant homes were selling in a matter of days or even hours, giving sellers the upper hand and reducing room for any negotiation from buyers. However, homebuyers kept engaging with the market since lower mortgage rates and remote work made homeownership a possibility for many.
The Future of the Housing Market
Experts agree that the housing market will continue to favor sellers for some time, possibly for years, but with slower growth in home prices and decelerating inflation. The large discrepancy between supply and demand for new homes will take a while to balance out, and the supply chain will need to work smoothly for some time before things can settle.
Although many other factors also create a seller’s market, the power dynamic between supply and demand is the main predictor of how things will turn out. Except in extreme cases, buyers and sellers can reach their goals regardless of who has the upper hand. However, sellers will get a better deal overall.
Seasonally, competition for homes and bidding wars tend to slow down in the winter. However, because competition has been so high overall, lowered levels this season are still high compared to years before the pandemic. Prices are expected to keep rising, so finding a home over the winter is probably wiser than waiting until spring.
Another factor predicted to cause major shifts moving forward is the adjustment of interest rates by the Federal Reserve. The American housing market is sustained through a complex system of loans and interest rates, flowing down from the federal level. When inflation is high, the Federal Reserve raises interest rates, which affects loans like mortgages in an aim to prevent further growth.
Higher mortgage rates mean buyers will have to pay more for homes, which could slow down the housing boom by discouraging some people. However, investors will benefit from these higher rates since they’ll be making back larger amounts of money from banks and homeowners.
After the pandemic caused many people to lose their jobs and experience financial insecurity, the government and banks responded with loan forbearance programs to protect individuals from being evicted or going into foreclosure. However, most of these will come to an end in early 2022, so experts like National Association of REALTORS® Chief Economist Dr. Lawrence Yun predict some stimulation to the housing market as more homes come up for sale.
Another factor that affects the housing market is consumer confidence. When people are optimistic about the future, they spend more and invest in long-term goals like houses. The early months of the pandemic caused a lot of uncertainty about the future and made many people question their goals and financial stability.
However, according to Kuba Jewgieniew, CEO of Realty ONE Group, consumer confidence and investments are growing as the pandemic era evolves. Looking forward, people will likely continue to move out of high-population areas because they’re seeking more space and homes with a smaller environmental impact.
Supply and Demand
Experts expect demand for homes to outpace supply for some time, so high competition and rising prices will continue to factor into buyers’ decisions. Rising interest rates may preclude some people from buying, which could tone down high competition rates. However, as incomes increase and employment rates move back to normal levels, the market should begin to balance out.
Changes in economic conditions are already affecting buyers. For instance, in 2021, lumber prices skyrocketed as demand for this building material outpaced supply. However, according to Kuba, lumber prices are expected to stabilize over the next year. This will make building new homes a more affordable option for many people.
With the ability to work remotely, some would-be homeowners have decided to hit the road in their RVs, using Zoom to connect to work along the way. This trend could potentially continue due to a combination of the challenging housing market and remote work becoming normal for many people and industries, according to Kuba.
The COVID-19 pandemic has led to a seismic shift in how individuals relate to their jobs. It’s allowed many home buyers to move farther away from their offices. While some companies may decide to bring their employees back to the office, others will likely establish remote work as a permanent option.
Many people are thriving with the increased flexibility, lack of commute, and control over their work environment. The Zoom RV craze may eventually calm down, but working from home will continue to impact real estate in unprecedented ways for years to come.
The Housing Market in 2022 and Beyond
The housing market has been dynamic over the last two years. The pandemic highlighted how even small changes can have a ripple effect on the opportunities available to home buyers and investors.
However, the market’s close connection with the economy also offers hope as 2022 approaches. Over time, supply and demand will balance out, and the tides will eventually turn to favor buyers again in the future. In the meantime, sellers can make the most of this time in history.
Rose Morrison is the managing editor of Renovated, a home living site where she shares the latest home renovation news and market trends. Throughout her writing career, Rose has been a regular contributor to a number of sites, such as the National Center for Construction Education & Research, the American Society of Home Inspectors, and the International Code Council.