Will the Housing Market Crash in 2022? Don't Count On It - Here's Why

Posted on Nov 10, 2021

According to data released by Zillow, U.S. home prices rose 13.2% over the past year. Fewer homes going on the market paired with more people looking for homes led to bidding wars and skyrocketing home prices across the country.

Not surprisingly, many people are wondering: will home prices drop in 2022? And is another housing crash on the horizon? Although it’s impossible to say for sure what will happen (COVID-19, after all, was an unpredictable event that majorly impacted the housing market), expert opinions, data, and historical trends all seem to point in one direction.

Will the Housing Market Crash in 2022?

Although many comparisons have been made to the 2007 housing crash, the situation could not be more different.

In 2007, lenders were giving out mortgages to underqualified individuals. There was an entire economy built upon mortgages, and the only way it worked was if home prices kept rising. When home prices briefly dipped, it meant that thousands of people owed more on their home than what their home was worth. A wave of foreclosures sent dipping home prices even lower than before, starting a downward spiral in home prices.

Since then, lenders have been required by law to tighten up their requirements, and the people applying for - and receiving - mortgages are extremely qualified to do so. And unlike in 2007, demand still outpaces the number of homes available by far.

Housing market experts have been releasing their predictions for 2022, and most seem to agree that the pace of 2021’s housing market was unsustainable. However, this doesn't mean a drop. Prices will continue to rise - just at a more leisurely pace. Fannie Mae is predicting a 7.9% rise through 2022, while Goldman Sachs economists predict that home prices will climb another 16%.

“I think home prices will drop out of the pandemic double-digit appreciation - they’re going to go back to the levels they were before pandemic pricing became a thing. For example, in Northern Virginia, the prices have appreciated 15, 16, even 20-something percent. It’s just not possible to stay at that level that long,” predicts Virginia-based buyer agent Muoki Musau. “That’s what I see happening. No one’s going to get discounts or deals - it’s just going to return somewhat back to normal.”

Trying to Time the Market? It’s a Gamble - One That May Not Pay Off

There are plenty of people right now hoping that home prices will go down in 2022, but if you’re trying to time the market, remember that doing so comes with a cost.

“Look at real estate as an investment - if you try to time anything, it’s typically a poor investment strategy,” advises Musau. “Normally, it doesn’t go the way you want. You just waste time and you remain in a situation that you know you want to get out of.”

Cost 1: Psychological Burden

People often underestimate the emotional and psychological toll of trying to time the market when something as life-changing as a home purchase is on the line. Waiting years to move your life forward, hoping for a dip that may never actually happen, is often a recipe for discontent.

“I think the biggest toll of trying to time the market is actually the emotional one," says Musau. "You’re in a place where you potentially want to change sooner rather than later and you get this anxiety of, 'Man, I want to time the market, and if I don’t get it right it’s big trouble.' You’re making a wager on yourself that’s putting undue pressure on your life and affecting your quality of life."

Cost 2: You Lose Out on the Benefits of This Market

Two positives in the current housing market are that interest rates are at a record low, and it's a great time to sell a home. Waiting to buy means you can't take part in either of these benefits.

"Interest rates are probably going to continue increasing, so if you want to leverage something that can help with hedging against inflation in the future, you’re going to be leaving a lot of future protection on the table," says Musau.

If you’re currently in a home and waiting for home prices to drop before you move, you’re potentially stunting your profits when you go to sell. “With selling your home, all you need is two offers to have a competitive advantage - so if you miss this hot market, you’re missing out on that possibility for your home.”

Cost 3: You Risk Burning Out

The longer people wait while trying to time the market, the more likely it becomes that desperation takes over and drives the decisions.

“The longer you wait, the less you actually end up getting for yourself," explains Musau. "Because you end up running out of steam, running out of motivation, and then you end up making big decisions just out of desperation rather than out of a consistent plan. You lose the momentum that would make it a manageable transition.”

Why Home Prices Continue Rising: More Households Form While Construction Lags

One reason the housing market is so hot right now is a lack of housing stock. Since the last housing crash, home building declined for years and only recently reached pre-crash levels again. Over the past decade, though, the U.S. population grew by 19.5 million people (+6.3%) - and all those people need homes. While about 7 million new single-family homes were built, over 12 million households formed over the same period.

“The general trend is that new construction is behind schedule for a long time,” observes Musau. “You have the number of new households in a year, and the number of homes that are required for those households and it doesn’t line up - there aren't enough homes being built.”

Over the past year, home building has increased. According to data from the Department of Housing and Urban Development, home building this August was up 17.4% since the same time last year. If this trend continues, more housing stock around the country will help to alleviate some of the population’s growing pains. Balancing this, however, is population growth: 1.3 million additional households are expected to form each year.

In all likelihood, home building won’t catch up to demand for new homes until 2023 - or even later.

Rising Mortgage Rates Could Slow Things Down

Mortgage rates fell dramatically during the pandemic. The decline meant that monthly home payments dropped by about 12%, allowing more people to enter the housing market. The potential for incredible savings was just too high for many people to turn down.

If mortgage rates begin to rise, though, the number of buyers in the market will decrease. Fannie Mae is predicting that mortgage rates will rise to an average of 3.4% next year, while the Mortgage Bankers Association believes rates will rise to 4% - a full point higher than they are now.

“It's supply and demand," explains Musau. "If you want to get a 30-year mortgage for 2.9% interest, that’s cheap money and everyone is going to try and get in on that. But if it’s a 30-year loan at 4.5%, for those people it’s more of an investment decision along with trying to make a life change. That's what I think is going to happen if rates rise - the demand is going to cool off in a significant way.”

Mortgage rates could potentially have a huge impact on housing demand - and therefore prices - in 2022, but it remains to be seen what high they will hit - and how much that will tamp down demand.

Buyers Looking for Deals Should Take a Proactive Approach

Ultimately, potential homebuyers may be asking themselves the wrong questions.

“When someone asks, is the market going to correct? I think the real question is, when am I going to be able to afford a home? And that question is different. People sense that the situation we’re in just can’t carry on like this forever, which is reasonable. If they assume, though, that a correction is going to end up creating ‘deals,’ then I think that’s overshooting your landing a bit," says Musau.

The “wait until the housing market crashes” approach is ultimately a passive one - buyers are waiting for the deals to come to them. Instead, home buyers should consider taking a proactive approach and try to create deals (which will allow them to take advantage of current low mortgage rates, which won’t be around forever).

“There are no deals in real estate that are waiting for you,” advises Musau. “You put things together - you put the financing together, you put the house together, you put the timing together. Deals are made, they’re not found. So if you want to find a deal, be really creative and try to help the seller solve a problem - and that’s how deals will come up.”

Will Home Prices Drop in 2022? Well...

So when will housing prices drop, you might ask? Unfortunately for homebuyers hoping to land a steal of a deal, all signs seem to point to home prices moving steadily upward in 2022 - so if you’re waiting for home prices to fall, you might be waiting a long time.

Rather than waiting for a day of dropped prices that may never come, Musau advises a more pragmatic approach to home buying in 2022:

“Be really clear on your financials, be clear on what’s important to you in a house, and be clear on what you are comfortable being flexible on. If you do those three things then whether the market corrects, crashes, or stays the same, it’s not going to matter - because you’ll have a plan. And then whenever a house comes up that fits that plan, you just go ahead and buy it. At that point you’re buying out of a plan, not based on your intuition or anything like that."

Learn more

Watch: Muoki's video "Should I Buy a House Now or Wait until 2022?"