Home price gains will shrink to 3-5% in 2022, experts say

Tight inventory and high rents will offset pressures from higher mortgage rates and inflation, housing economists predict.

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | October 17, 2021

Freddie Mac mortgage rates climbed to 3.05% this week, 40 basis points higher than in January. That’s before the Fed’s much anticipated plan to curtail bond buying, tapering mortgage-backed security purchases to $40 billion per month.

Certainly, supply chain challenges and labor shortages have contributed to the Consumer Price Index climbing to a massive 5.4%.

A barrel of oil is nearly double the price it was one year ago, now at least $73.

Will higher mortgage rates and inflation torpedo home prices? What do the experts see on the housing road ahead?

Jeff Tucker, senior economist at Zillow, sees the pace of home price appreciation slowing down next year. The national Zillow Home Value Index is expected to rise 7-9% next year. That’s a slowdown from the 11.7% growth pace of August 2020 through August 2021.

Price gains will be even slower in expensive West Coast markets like Seattle, San Francisco and Southern California, Tucker said.

“The most expensively priced markets will hit a plateau,” he said. “Prior (home price) gains were almost entirely offset by lower interest rates.”

Yet, homebuying demand remains strong even as interest rates rise. Using rent as a barometer of housing demand for all housing types, Tucker noted that rent is rising in all markets. Remote working also is making it easier for some millennial homebuyers to find more affordable housing in less expensive areas.

“With a good job, they can buy a home someplace they can afford,” he said.

Tucker sees the 30-year fixed mortgage climbing a bit to 3.25% this year, landing around 3.4-3.7% by the end of 2022.

Redfin Chief Economist Daryl Fairweather sees national home price appreciation at 3-5% for 2022, with the 30-year fixed mortgage rate ending the year at 3.6%.

Fairweather cites climate change as the housing crisis for the next 30 years.

“Even if we get down to zero carbon emissions, every year is worse,” she said. “(California) homes in fire-prone areas are expensive to insure. Brush clearing and metal roofs are expensive. Wildfires cause enormous economic damage.”

She sees Palm Springs as a strong area for remote workers to purchase homes.

Fairweather is optimistic about the recent California rezoning laws as an avenue to increase the housing supply.

Rising interest rates could cause home prices to drop in 2023, observed Raymond Sfeir, director of the Anderson Center for Economic Research at Chapman University.

Sfeir thinks the Federal Reserve will start tapering next month, buying one-third less in Treasury and mortgage bonds, currently at $120 billion per month. Short-term interest rates like the prime will push up sooner.

“I would not be surprised if home prices start going down in 2023,” he said.

The low number of homes for sale is the only thing keeping prices up. Sfeir observed people are staying in their homes about nine years on average, compared with a historical average of five years. And retirees are staying put because senior retirement homes are extremely expensive.

As for inflation, Sefeir said, “the Fed board members have been wrong every time they met.”

Jordan Levine, chief economist at the California Association of Realtors, sees California median home prices rising 5.2% in 2022, compared with the astronomical 20.3% gain projected for 2020. But don’t expect price drops.

“We don’t see home prices reversing course,” said Levine. He predicts sales will drop 5.2% next year from 2021 levels.

Demand is back sooner than supply. California lost 2.7 million jobs last year due to the pandemic. Levine observes we’ve already gained back 1.7 million jobs.

Freddie Mac rate news: The 30-year fixed rate averaged 3.05%, 6 basis points higher than last week. The 15-year fixed rate averaged 2.3%, 7 basis points higher than last week.

The Mortgage Bankers Association reported mortgage application volume was unchanged from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $625,000 loan, last year’s payment was $81 less than this week’s payment of $2,652.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 2.25%, a 15-year conventional at 2.25%, a 30-year conventional at 2.875%, a 15-year conventional high-balance ($625,000 to $822,375 for most lenders) at 2.69%, a 30-year conventional high-balance at 3.125% and a 30-year fixed jumbo at 3.625%.

Eye catcher loan of the week: A 15-year fixed rate at 2.5% without cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.

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Jeff Lazerson - Mortgage Columnist since 2011