Homebuyers can expect several more months of double-digit home price growth as the housing market settles into a new normal.
The latest forecasts from Fannie Mae show home prices growing 15.5% year-over-year in the first quarter of 2022 before stepping down to 7.6% annual growth by the end of the year.
Fannie Mae is one of two government-sponsored enterprises that purchase a majority of conventional loans from mortgage lenders on the secondary market.
Fannie also forecasted an average 30-year fixed mortgage rate of 3.2% for the first quarter of 2022, based on rates data available at the end of last year. However, that forecast already feels outdated as the average 30-year rate has increased rapidly from 3.11% to 3.56% in the last three weeks, according to the Freddie Mac Primary Mortgage Market Survey.
Home price growth and mortgage rates are much higher than Fannie economists forecasted at this time last year. The January 2021 forecast for Q1 2022 called for 3.9% annual price growth and a 30-year mortgage rate of 2.9%.
The graph below shows the last 13 Fannie Mae forecasts for the first quarter of 2022 and reveals a few things.
- How difficult the housing market is to predict over the long term
- How far the 2021 market exceeded expectations
- How fast economic circumstances can change (look at the change in home appreciation forecasts from June to July)
This is not meant to poke fun at Fannie Mae forecasters. Who could have predicted two new COVID variants and 7% inflation, let alone how they would affect the housing market? It’s simply one way to measure how much the housing market has changed in the last year.
Based on last January’s forecast, 15.5% home price growth in Q1 2022 seemed unimaginable. But based on the most recent forecast it’s not only a likely scenario, it’s actually a step toward normal.
Home price growth peaked at 18.5% in Q3 2022 and is expected to step down each quarter until reaching 7.6% by the end of the year. Historically, 3-5% annual home appreciation is considered normal.
|Annual home appreciation||15.5%||11.8%||9.3%||7.6%|
|30-year fixed rate mortgage||3.2%||3.3%||3.3%||3.4%|
For homebuyers, the ‘new normal’ for 2022 looks a lot like 2021’s less affordable step-brother.
Inventory was at an all-time low for December with less than 500,000 active listings and strong demand is all but guaranteed by an incoming wave of millennials aging into their prime homeownership years.
Meanwhile, inflation-combating measures by the Federal Reserve are already putting upward pressure on mortgage rates, which will further erode affordability for homebuyers.
If there’s a silver lining, it’s that these factors are expected to put an end to the double-digit price growth that’s been a hallmark of the pandemic.