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Housing market predictions in 2022: Will prices drop in the third quarter?

By Natalie Campisi
Reprinted from Forbes Advisor.

Low inventory, fervid competition and massive price gains have battered buyers since 2020, but now rapidly rising mortgage rates are making it even harder to purchase an affordable home.

For many buyers, higher mortgage rates mean they can no longer afford homes in specific price ranges. The problem is that even modest single-family homes cost as much as lavish pads did a few years ago, so buyers are stuck either waiting for more inventory to come online or moving to a more affordable area. And there are many more who are hoping prices will drop—but that might not happen anytime soon.

“If you’re waiting for prices to suddenly plummet to what they were in the past, you’re making a mistake,” says Tabitha Mazzara, director of operations at Mortgage Bank of California. “The Fed has promised another interest rate boost. If you’re ready to buy, don’t wait because prices aren’t headed dramatically downwards to what our parents paid. Things might dip a bit, but there’s no cliff dive that’s going to happen.”

Increased housing costs all around

Home prices were up 18.7% from quarter one of 2021 to the first quarter of 2022, according to the latest Federal Housing Finance Agency (FHFA) House Price Index report. Higher mortgage rates added to the cost of buying a home, as they rose sharply in March and April; however, those big spikes may level off.

Nadia Evangelou, senior economist and director of forecasting at the National Association of Realtors, says rates should average around 5.7% by late 2022.

But these higher costs are putting pressure on the housing market. The Mortgage Bankers Association (MBA) recently reported that a steep decrease in mortgage applications to buy and refinance “pushed the market index down to its lowest level in 22 years.”

As we head into the typically active homebuying summer season, experts chime in on what we can expect from prices and rates.

Will home prices continue to rise in 2022?

The fundamental supply and demand imbalance in the housing market has caused most experts to forecast higher home prices throughout the rest of the year.

Fannie Mae predicts prices will move up in 2022 by 10.8%, but they also forecast a significant cooldown in 2023, with prices climbing just 3.2%.

A recent Zillow survey showed that 60% of housing experts believe we’re not in a bubble, citing strong fundamentals such as scarce inventory and shifting housing preferences as the reason for the double-digit home price appreciation over the last couple of years.

With rates rising, money isn’t as cheap as it was a few months ago, which might sideline investment activity—a move that could help some buyers gain footing.

“We will see a customary drop in home prices as investors begin to leave the market,” says Yatin Karnik, founder of Confer, Inc., a company that helps residential homebuyers find affordable mortgages. “However, many prospective homebuyers will still find the cost of a mortgage unaffordable at these prices. Homebuyers need to be educated about the various down payment assistance programs available.”

Higher home prices—bad for buyers, good for homeowners

While buyers suffer through this tough market, homeowners are watching their home values flourish. Higher home prices mean homeowners are seeing even more equity gains. In the first quarter of 2022, U.S. homeowners snagged $60,000 in equity, according to a recent CoreLogic report.

“Price growth is the key ingredient for the creation of home equity wealth,” said Patrick Dodd, president and CEO at CoreLogic, in a statement. “Home prices were up by 20% in March compared to one year earlier in CoreLogic’s national Home Price Index. This has led to the largest one-year gain in average home equity wealth for owners and is expected to spur a record amount of home-improvement spending this year.”

Should you buy a home now or wait?

Buying a house—in any market—is a highly personal decision. Because homes represent the largest single purchase most people will make in their lifetime, it’s crucial to be in a solid financial position before diving in.

Start with a budget and make a pact with yourself to stick with it. In today’s market, you may still find yourself in a bidding war, but that can be dangerous as it’s tempting to want to win a home at all costs, which could end up breaking your budget. And with limited inventory, some buyers might make more concessions than they would in a balanced market—ending up with an overpriced house that doesn’t meet their needs.

“There are a lot of factors going into buying right now, and frankly, a lot of people are scared to make a mistake,” says Jennifer Baptista, a real estate agent at Fresh Starts Registry in Andover, Massachusetts. “Between rates rising, horror stories of people paying $100,000 over ask[ing price], and losing home after home, it can feel like a nightmare. As a seasoned agent, I ask my clients first and foremost, ‘What does your gut say?’ If the [timing] feels wrong, you will always find the wrong home, so just wait.”

Rachel Luna, the principal of Patriot Title in Houston, also advises buyers to slow down. The scarcity mentality in the market has driven people to make fast decisions, which can quickly turn into buyer’s remorse.

The problem is you can’t return the house if you realize you overpaid or just bought a place you don’t like. The seller’s costs can run up to 10% of the home’s sale price, so you could end up losing money if you turn around and sell it.

“Be patient,” Luna says. “What really matters when purchasing a house is your personal finances and long-term economic stability. Ask yourself: Are you debt-free? Do you have an emergency fund for three to six months of expenses? Will your monthly house payment be 25% or less of your monthly take-home pay? If you don’t comfortably meet these qualifications, it wouldn’t matter if the market is in your favor. Buying a home right now would be a disaster instead of a dream come true.”