What’s the Current State of the Housing Market?

March 10, 2022

If you’ve watched home prices in your area throughout the pandemic, most likely you’ve been shocked to see a $500,000 home become a $600,000 home in a year or less. In some markets, that $500,000 home could even be close to $700,000. The housing market has been red hot due to a variety of factors including inventory, interest rates, pandemic fueled migration, and millennials finally entering the market as first-time home buyers.

Watching prices rise so quickly might bring back some memories of a time about 15 years ago for many of us. While it is common for “this time is different” to be an indicator of bubbles ready to pop, there are indeed some differences this time around. So where is the housing market currently, and why are some forecasting a downturn? Let’s go through what has driven the market higher and the differences going into the end of Q1, 2022.


Corelogic’s U.S. Home Price Insights forecasts that from January 2022 to January 2023, home values will increase on a year-over-year basis by 3.8%. This is fairly close to the historical mean for a healthy housing market where inventories are five to six months out. From 1989, the historical average annual rate has been 4.2%, according to the S&P/Case-Shiller U.S. National Home Price Index.

Where We’ve Been

To compare, home values grew by 19.1% in the preceding January to January time frame. One cause was an unprecedented migration of Americans from higher-priced, large markets to lower-cost, smaller markets as remote work caught on due to the pandemic. Remote work seems to be here to stay, albeit not at the pandemic levels. Additionally, the pandemic resulted in a Fed Funds rate at 0-0.25% and the lowest mortgage rates, with Freddie Mac reporting an average rate of 2.68% in December 2020 – the lowest mortgage average rate in history. Theoretically, low mortgage rates reduce payments meaning buyers can afford more expensive homes.

At the same time, the nation has been short by as much as 3.5 million single-family homes needed to meet the demand of millennials finally entering the market as first-time home buyers. Historically renters, millennials have entered the market later than prior generations but have come en masse.

Where We Could Be Headed

According to industry thought leaders, several factors could contribute to the cooling of the hot housing market in 2022.

Increased Interest Rates

The Federal Reserve is expected to raise rates three times in 2022. Fed Chairman Jerome Powell is signaling a 0.25% increase in March, but 0.5% increases are not off the table later in the year if inflation stays high. Currently, rates reflect the chances of rate increases with the average mortgage rate about 2 points higher than it was in December 2020. Mortgage payments for new loans are now higher as a result.

High Prices

Even in times of housing undersupply, prices can reach a point where things are out of reach of many buyers. Millennials simply can’t afford homes at the current prices or the payments at the higher interest rates. A house that increased in price $100,000 last year, now requires a higher downpayment as well.

Slowed Migration

Some return to normalcy has slowed migration from high population centers as people return to the office. Additionally, low-priced housing markets are no longer low priced and not as attractive.

Increasing Inventory

Builders will continue to try and meet demand due to high prices but the bidding wars for homes have mostly slowed. As the supply chain resolves itself, home building materials are finally reducing in price, making building very profitable. Still, there is no chance builders catch up this year or maybe even in 2023.

Given the current economic backdrop, some believe it’s likely that inventories will be constrained but rates will go up. Overall it seems the housing market is reflecting prices that exceed what is affordable to many Americans. Interest rate increases will only compound the affordability issue. Reduced demand will likely result in a slowing of price appreciation. While not showing any signs of a crash or falling prices, many in the industry feel the market has the potential to drop slightly below historical appreciation levels in 2022, and well below the 2021 levels. 

The wild card in 2022 is inflation. If it stays high and rates go up in tandem, there is potential for prices to start decreasing.

This article is provided for informational and educational purposes only.  It is not intended to be investment advice and should serve as the basis for an investment decision. 

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