The Five Biggest Housing Market Questions of 2022 Answered

The end of 2021 and beginning of 2022 have been record-breaking months for the housing market, leaving many homebuyers wondering when the fever will break.

That’s evident in the top Google searches related to the housing market. So we compiled 5 trending search queries and have done our best to answer them.

Read on if you’d like to make sense of a seemingly senseless housing market.

When is the housing market expected to drop?

The answer to this question depends on who you ask and how you define “drop.”

If you’re a homebuyer, your primary concern is probably when home prices will drop. There are a few ways to answer that, too, but the simplest answer is this: not anytime soon.

That’s because this market is built on strong fundamentals for price growth. Decades of underbuilding following the 2008 market crash left insufficient inventory for the massive wave of millennials currently aging into their prime homebuying years, setting the table for a seller-friendly market. And that’s before the pandemic and sub-3% mortgage rates ignited a homebuying frenzy and increased the time and money required to build more homes.

Rising mortgage rates may soften demand and cool price growth, but even rates in the 5’s are unlikely to bring prices down, according to forecasts from housing authorities Fannie Mae and Freddie Mac.

Freddie Mac is forecasting price growth to average 10.4% year-over-year in 2022 and 5% in 2023. That’s down from 17.8% price growth in 2021 – but still a long way from home prices decreasing.

Similarly, Fannie Mae is forecasting double-digit price growth throughout 2022 before cooling to 3.2% growth by the end of 2023.

YoY price growthQ2 2022Q3 2022Q4 2022Q1 2023Q2 2023Q3 2023Q4 2024Fannie Mae15.9%12.9%10.8%6.5%5.4%4.3%3.2%Data from Fannie Mae.

Given that low supply and high demand are baked into the market for at least the next several years, the housing market isn’t expected to drop anytime soon.

Is there a housing bubble brewing in 2022?

This topic rose to popularity after the Federal Reserve Bank of Dallas published an article titled Real-Time Market Monitoring Finds Signs of Brewing U.S. Housing Bubble.

The Dallas Fed data shows that with mortgage rates and home prices rising in 2022, homebuyers are putting a larger percentage of their income toward housing payments.

However, “bubble” may be been too strong a term, especially given the article concluded with the following:

“Based on present evidence, there is no expectation that fallout from a housing correction would be comparable to the 2007–09 Global Financial Crisis in terms of magnitude or macroeconomic gravity. Among other things, household balance sheets appear in better shape, and excessive borrowing doesn’t appear to be fueling the housing market boom.”

Bubbles are built on credit and speculation, as we saw in the mid-2000’s. But even the Dallas Fed says buyers are in better shape and largely staying within their means (thanks in part to tighter lending standards).

The recent near-20% annual home price growth isn’t healthy or sustainable. But to say today’s housing market is a bubble is a stretch, and so is saying the bubble has burst at the first sign of a market correction. Slowing price growth, and perhaps price decreases, would be a step toward a normality and a healthier housing market, not a doomsday sign.

Housing market predictions 2023

OK, clearly this isn’t a question, but according to Google the 2023 housing market is already top-of-mind for many homebuyers. And who can blame them based on how 2022 has started?

Let’s circle back to Freddie Mac and Fannie Mae – two of the biggest mortgage backers in the country – for some way to early 2023 housing market predictions.

Fannie Mae is forecasting 30-year fixed mortgage rates in the mid-4’s throughout 2023 and annual price growth beginning at 6.5% in Q1 and tapering to 3.2% by Q4. It’s important to note that 30-year mortgage rates are already into the 5’s, so this forecast is already off-track.

Freddie Mac is forecasting 30-year mortgage rates to hover around 5% throughout 2023 and price growth to average 5% for the year. This seems more likely given the higher mortgage rate predictions, but there is a lot of 2022 left to play out.

To be frank, it’s way too soon to be predicting anything for 2023. Even short term home price and mortgage rate forecasts have been wildly inaccurate in 2022, and an unexpected move from the Federal Reserve or another severe COVID wave could throw any 2023 housing market predictions way off track.

Why is the housing market so high?

We’ve covered much of this in previous questions, but at its core, today’s hot housing market boils down to a severe imbalance in supply and demand.

On the supply side, homebuilders were completing well over 1.5 million homes per year prior to the 2008 market crash. After the crash, that rate fell to less than 400,000 homes per year at times, and has been slow to recover.

When COVID hit, two things happened that further hampered supply:

1. Ultra-low mortgage rates, remote work opportunities, and COVID concerns sent Americans into a single-family home buying frenzy, further reducing supply
2. Shutdown, layoffs, and the ensuing global supply chain tangles made homes much more expensive and time consuming to build

On the demand side, there are simply way more buyers in the market due to demographics, pandemic effects, and solid employment.

Demographically, millennials are the largest generation in US history and they are just reaching prime homebuying age during a time of strong employment and wage growth. People have to live somewhere, and buying a home means locking in a fixed housing cost and building equity, while renting is subject to continuous price increases.

Due to these forces, supply and demand were going to be out of balance in the 2020’s. The pandemic exacerbated this imbalance by introducing record-low mortgage rates, desire for more space, work from home opportunities, and no small degree of monkey-see-monkey-do.

And to add one more factor to the equation, fast-rising rates in early 2022 likely sent many homebuyers rushing into the market to lock in rates while they were low. This fear-of-missing-out wave further exhausted inventory at a time when it is usually recovering.

When will the housing market get better?

As HousingWire lead analyst Logan Mohtashami likes to say, we're witnessing a “savagely unhealthy” housing market in 2022. And although he probably didn’t pull that term out of an Economics textbook, he’s right.

Several months of near-20% price growth isn’t healthy. Neither is 1.6 months of housing supply, when 6 months is considered balanced.

Unfortunately, there is no magic pill to immediately bring the market back into balance. But there are signs that the market is beginning to cool, and forecasts show price growth nearing typical 3-5% annual appreciation in 2023.

A healthier or “better” housing market will feature slower price growth, more inventory, less bidding wars, more time to find and consider homes, and eventually more negotiating power for buyers. Those things should begin to come into view this year – but they come at the price of higher mortgage rates.

Mortgage rate projections are not a reflection of Fairway’s opinion or guarantee of interest rates in the current or upcoming market.