Due to a perfect storm of low supply, high demand, and tantalizing mortgage rates, 2021 was a historic year for the housing market that produced record home price growth.
Homebuyers hoping for a change of pace in 2022 may be in for a letdown. According to Zillow’s Hot Housing Takes for 2022 the housing market will “fall just short of record-breaking” with many of the same features as 2021, and a few new ones.
Here’s what homebuyers can expect in 2022 based on Zillow’s research.
How the 2022 housing market will be similar to 2021’s?
In many ways, 2022 is shaping up to be a continuation of 2021. Zillow predicts sellers will keep the upper hand as demand continues to exceed supply, resulting in another year of double-digit price growth.
“We’re expecting that home prices will stay elevated through mid-2022 on the annual level before they take that turn back toward normal, ending the year at 11%,” Zillow economist Nicole Bachaud told Home.com. “We still have this huge demand from millennials trying to buy their first home, a lot of baby boomers transacting in the market as they reach retirement age, and we still have really low supply.”
Related reading: 2022 Home Price Growth Forecasts Soften to Industry Average Near 6%
Zillow predicts a total of 6.35 million existing home sales next year, up from an estimated 6.12 million this year. Even with the most home construction starts since 2006, supply shortages will continue to persist throughout 2022 leading to bidding wars in the busy spring and summer months.
“It’s going to take a while for that new construction to hit the market, especially given supply chain and labor shortage issues,” Bachaud said. “There are a lot of homes in the funnel, and it will take a while for them to hit the market, but we’ll see some of that new inventory in 2022.”
Even with new-build homes coming online, low-income and first-time buyers are likely going to face affordability challenges in 2022 as they did in 2021. That’s because as home prices and mortgage rates increase, the downpayment hurdle will get higher.
“The biggest challenge is going to be down payments as home prices are rising so fast, and renter incomes are not keeping up with that,” Bachaud said. “So to save up for that moving target of down payment is going to be more of a challenge.”
How 2022 will be different than 2021?
The proverb “necessity is the mother of invention” seems to apply to Zillow’s 2022 housing market predictions. Facing another year of challenges, Zillow expects homebuyers to search for alternative ways into the market before giving up.
The primary challenge will likely be declining affordability as both mortgage rates and home prices increase. Bachaud doesn’t expect rising mortgage rates to soften demand, just alter people’s homebuying journey.
“We still had a lot people buying homes when interest rates were around 8%,” she said. “So, that doesn’t always stop people from buying homes – people move for different reasons. They figure out a way to make it work.”
One way to make it work is to buy in markets where home prices are still relatively low.
Zillow foresees smaller, more affordable secondary Sun Belt markets emerging as the real estate hot spots in 2022. In 2021, migration to primary Sun Belt markets like Austin, Phoenix, Tampa and Miami caused rapid price growth that will these areas unaffordable to future homebuyers.
“Consumers in these markets are realizing they can’t buy the same home that they could a year ago,” Bachaud said. “So we’re seeing these other secondary markets like Sarasota (Fla.), Raleigh (S.C.), and Daytona Beach (Fla.) that are picking up a lot of that excess demand.”
Younger buyers to purchase ‘second homes’ as first homes
Zillow also foresees savvy Millennial and Gen Z buyers opting to buy “second homes” (vacation homes) before primary residences as a way to break into the market and start building equity. That means buying a home to rent out as an investment property or a part-time vacation home instead of moving into it.
This may require teaming up with friends or family, but it’s a way of entering homeownership through the side door as a way to hedge against inflation.
Finally, Zillow sees demand for large rentals, like single-family homes, increasing as home shoppers are sidelined by declining affordability.
“We have survey data that shows every year since 2018 that the share of renters considering buying has gone up, while the share of first-time buyers has dropped,” Bachaud said. “So we have a lot of people that want to become homeowners, but they can’t do it.”
Buying a home may not be much easier in the coming year, but homebuyers that are willing to get creative will still find ways to enter the market.