EDITOR'S NOTE: Inflation is alive and well in the housing market. Analysts have noted, however, that sales are cooling. Despite the Fed’s intentions to hike interest rates three times this year, economist forecasts are wide enough to inspire uncertainty. We’re talking price growth forecasts between 2% and 14%—the “we don’t have a clue” grade of accuracy. Mortgage rates, inventory, and their effects on buying sentiment will play a critical role in driving the direction of home prices this year. Bill McBride of Calculated Risk delivers a sharp analysis of the current market and the factors that will drive it in the months to come.
Earlier I posted some questions on my blog for next year: Ten Economic Questions for 2022. Some of these questions concern real estate (inventory, house prices, housing credit, housing starts, new home sales), and I’ll post those in the newsletter (others like GDP and employment will be on my blog).
I'm adding some thoughts, and maybe some predictions for each question.
9) House Prices: It appears house prices - as measured by the national repeat sales index (Case-Shiller, FHFA, and CoreLogic) - will be up around 18% to 20% in 2021. What will happen with house prices in 2022?
The following graph shows the year-over-year change through October 2021, in the seasonally adjusted Case-Shiller Composite 10, Composite 20 and National indices (the Composite 20 was started in January 2000).
The Composite 10 SA is up 17.1% year-over-year. The Composite 20 SA is up 18.4% year-over-year. The National index SA is up 19.1% year-over-year. Other house price indexes have indicated similar gains (see table below).
The YoY National Index price increases in 2021 will probably be the strongest on record (with two months to go).
Although I mostly use Case-Shiller, I also follow several other price indexes. The following table shows the year-over-year change for several house prices indexes.
The Recent Deceleration in YoY Prices
Both Case-Shiller and FHFA noted the recent deceleration in house price growth. From the FHFA:
“House price levels continue to rise but the rapid pace is curtailing through October," said Will Doerner, Ph.D., Supervisory Economist in FHFA's Division of Research and Statistics. “The large market appreciations seen this spring peaked in July and have been cooling this fall with annual trends slowing over the last four consecutive months."
And from Case-Shiller:
“In October 2021, U.S. home prices moved substantially higher, but at a decelerating rate,” says Craig J. Lazzara, Managing Director at S&P DJI.
I discussed The Coming Deceleration in House Price Growth back in October. The following graph - as of the NAR release last week - shows that Case-Shiller followed the median prices up and is now following the deceleration in median prices.
This suggests some further slowing the Case-Shiller and FHFA indexes over the next few months, but still solid double-digit growth.
There are a wide range of price forecasts for 2022, from around 2% YoY growth to as much as 14%.
Inventory Will be the Key
If inventory doesn’t increase in 2022, house prices will continue to increase at a double-digit pace. There are several possible reasons for an increase in inventory in 2022. Here are a few:
A sharp increase in mortgage rates.
Economic problems overseas that spillover into the US.
Unregulated areas of finance causing economic problems.
Affordability (a combination of higher mortgage rates and higher prices).
A sharp increase in mortgage rates is possible, especially if inflation stays elevated and the pandemic subsides (each wave of the pandemic has pushed down interest rates). And at some point, affordability will start to matter, but in general - with low mortgage rates - houses are still somewhat affordable (see the bottom of this post on affordability).
My guess is inventories will probably increase, especially in the 2nd half of 2022, but inventory will most likely still be low historically. Also, prices tend to have momentum, so unless mortgage rates increase sharply or inventories rise quicker than expected, we should expect further price increases in 2022.
So, based on my inventory forecast and further progress with the pandemic, my guess is that year-over-year price increases will probably be the strongest early in the year, and then soften towards the end of 2022. Price appreciation will decrease from the unsustainable 2021 pace but seems likely to still be in the mid-to-high single digit range in 2022.
I’ll adjust this forecast depending on what happens with inventory in 2022.
• Question #1 for 2022: How much will the economy grow in 2022?
• Question #2 for 2022: Will the remaining jobs lost in 2020 return in 2022, or will job growth be sluggish?
• Question #3 for 2022: What will the unemployment rate be in December 2022?
• Question #4 for 2022: Will the overall participation rate increase to pre-pandemic levels (63.4% in February 2020)?
• Question #5 for 2022: Will the core inflation rate increase or decrease by December 2022?
• Question #6 for 2022: Will the Fed raise rates in 2022? If so, how many times?
• Question #7 for 2022: How about housing starts and new home sales in 2022?
• Question #8 for 2022: Housing Credit: Will we see easier mortgage lending in 2022?
• Question #9 for 2022: What will happen with house prices in 2022?
• Question #10 for 2022: Will inventory increase as the pandemic subsides, or will inventory decrease further in 2022?
Originally posted on Calculated Risk.