2021 was a year of political and economic change. It brought the country a new presidential administration and wavy recovery from the largest shock to the U.S. economy on record. The U.S. housing market not only weathered these changes but also thrived during them. Will the party continue into 2022? 

To help answer this, we’ve compiled five key indicators to watch next year: housing inventory, mortgage rates, household formation, federal legislation, and home price growth. We’ll not only share what we’ll be expecting in 2022 but also how these indicators fared in 2021. Our eyes will keenly be focused on:

Indicators to watch for housing in 2022-2023

Housing inventory

Sellers’ fears of having sick strangers in their homes led to a quick reduction in the number of homes on the market in 2020. This sharp reduction induced a downward spiral of inventory that fell to the lowest level on record in February of 2021. While inventory began to show signs of a positive recovery from March through July, August brought the start of seasonal cooling, busting hopes of steady recovery that would persist through it. 

With healthy demand fueled primarily by demographic tailwinds, the story of inventory in 2022 will dictate whether we return to a “normal” looking housing market or whether the craziness continues. Current inventory is about 55% of what it normally is in November, which means we’d need nearly double the number of homes on the market to get back to pre-pandemic levels. While this is unlikely to happen all at once, a combination of pent-up supply, new home building, and distressed homeowners deciding to sell could help get inventory to near-normal levels by spring.  

Mortgage rates

applying for a loan during covid

Mortgage rates also hit historic lows in 2021, bottoming out at 2.65 percent in the week ending January 8th. This – along with the record low inventory that hit just two months later – surely fueled a record rise in home prices that occurred later in the year (more on that to come in point #5 below). Rates have risen a full 30 basis points since then, and with the economy recovering from the pandemic-induced job loss at a quickening pace, rates are likely to rise in 2022. The important question is will rates rise to the point of affecting the housing market?

If the most recent climb in interest rates (pre-pandemic) is any indication, rates would have to rise by between 100-150 basis points to induce noticeable cooling in-home price appreciation. Between September 2017 and November 2018, average rates on a 30-year mortgage rose by about 140 basis points. Home price response to interest rates lagged as they do, but year-over-year home appreciation was halved, falling from around 6 percent at the end of 2018 to around 3 percent by mid-2019.

Household formation

Household formation is the key to housing demand in the long run and is simply the number of new “families” occupying housing units in a given period. Demographers and economists bifurcate household formation into two types: owner and renter formation, being the number of new home-owning households and new renting households, respectively. The number of new owning households represents new demand for owner-occupied housing, while the number of new renters represents new demand for rental units. If the number of new owners outpaces the number of new renters, the homeownership rate goes up and vice versa.

Though 2020 brought us a year when measuring household formation was nearly impossible due to pandemic-induced survey challenges, 2021 brought the highest two-year rate of household formation in at least two decades. Over four million new households took to occupying homes between 2019Q3 and 2021Q3, with a large majority of them (over 3.5 million!) being new owner-occupied households. On an annual basis, this works out to be about two million new households and 1.75 million new owner households. This is an unusually large gain in new households, and given both prices and rents have risen sharply this year, we would expect household formation to slow to more normal levels in 2022.

Read more: How the pandemic changed home values

Federal legislation

Congress finally passed the long-anticipated Infrastructure Investment and Jobs Act, directing about $1.2 trillion towards investment in the nation’s infrastructure. Among investments in traditional infrastructures, such as bridges, roads, and transit, the act provides about $150 billion in funding for housing and regional development programs. Such programs include $10 billion in down-payment assistance for first-generation homeowners, $24 billion in funding for housing vouchers, and $5 billion for subsidized mortgages for low-income households. Will these new federal investments in housing help the market get back to normal next year? Our intuition tells us that despite good intentions, these programs aren’t likely to help the market normalize.

This is because today’s market is characterized by distortions caused by supply, not demand, issues. Even prior to the pandemic, inventory was near historic lows. The pandemic pushed those record lows even further and coupled with a large young cohort of eager homebuyers who are rethinking how they live and work, home prices surged as a result. Thus, federal policies that juice demand, such as subsidized mortgage rates and down-payment assistance programs, but don’t adequately address supply are likely to support price irregular price growth in the coming years. 

Home prices

down payment assistance

The last, but certainly not least, housing market metric to watch out for in 2022 is home price growth. 2021 brought the U.S. housing market the largest year-over-year increase in housing prices on record, topping out between 18-20% depending on which home price index you pay attention to. Home price growth of this magnitude certainly isn’t sustainable, but will it last into 2022? Our expectations are that home price growth will cool to around 5-8%. Here’s why.

First, mortgage rates are likely to rise next year, and if they rise by 100-150 basis points, the buying power of U.S homebuyers will fall. This, in turn, should lower the rate of price growth. Second, housing affordability could be hitting a ceiling because of record price growth this year, so if 2022 doesn’t bring record wage growth, it will be difficult for price growth to sustain the momentum it had in 2021.

Last, and perhaps the biggest wildcard, is the possible emergence of pent-up supply. Existing homeowners have been reluctant to sell, and those impacted by job and income loss have been protected by generous foreclosure protections from the federal government. Now that these homeowners have seen an incredible rise in equity over the past year and foreclosure moratoriums have been lifted, this spring could bring an unexpectedly sharp rise in inventory that would help the housing market normalize. If this were to happen, it would likely put downward pressure on home price growth.

The 2022 takeaway

Nationally, we expect the housing market to become healthier in 2022. Frustrated home buyers may feel some relief as inventory starts to tick up, but that will come at the expense of higher mortgage rates. Household formation – especially for owner-occupiers – has been on a tear over the past few years, but that should return to a normal-ish number of 1 million new households next year. The Infrastructure Investment and Jobs Act will help boost housing demand for lower-income households, but a dearth of housing supply is likely to cancel out any such affordability gains that might come from it. Last, we expect home price growth to moderate to between 5-8% year-over-year by the end of 2022.

Read more: Prevent home buyer’s remorse

Five key indicators to watch for housing this year was last modified: August 10th, 2023 by Ralph B. McLaughlin