Industry Outlook

The Housing Market: ...

The Housing Market: What to Expect in 2022

By Oren Jacobson 2 min read

Economic and housing analysts across the country are offering their predictions for 2022. Readers of this piece undoubtedly want to know the answer to a very simple question: Will 2022 be another strong year for home builders? Or is this the year the incredibly hot market finally cools off and the industry experiences a correction? 

Let’s start with the fundamentals of the current market as we enter the new year. Notwithstanding any of the major frustrations for buyers and builders caused by unavoidable construction delays, housing supply remains relatively low, mortgage interest rates remain historically low, and demand remains reasonably strong — a good setup for home builders.

However, there are many major variables in the broader macroeconomic picture that make predicting 2022 complex. For example, what will the impact of the Omicron variant be? For the first time in the pandemic, it appears as if the surge in cases is spread across the entire country all at once, rather than regionally contained. Just this week alone, millions of new cases have been diagnosed. Even if this variant is less deadly, the sheer volume of cases could impact schools, healthcare systems, and corporations everywhere simultaneously, to say nothing of supply chains. 

Then, there is inflation. With supply chains still bottled up and strong demand for goods, will real prices keep rising at the elevated rates we saw last quarter? And what will the Federal Reserve do with interest rates as it gathers more data about inflation? Keep in mind, the FED’s mandate includes preventing an economy from overheating, which means raising rates to counteract price increases to prevent runaway inflation. That combination can bring about a recession.

Then you have major fiscal policy questions facing Congress and the Biden Administration. Student loan payments have been suspended since the start of the pandemic but are set to turn back on May 1. And the generous Child Tax Credit, which was part of the pandemic relief packages, just expired. Both issues will impact the consumption power of tens of millions of American families. Congress is also still considering another massive economic investment package, largely centered on climate and issues like family leave and childcare, which some fear could exacerbate inflation further. 

Because of these variables, there is an incredibly wide range of possibilities for the general economy based on how these variables, which only represent a handful of the unknowns, shake out. You could make a compelling case for a moderate risk of a recession in 2022. You could also make a compelling case for a booming American economy by the summer with widespread gains, especially if the supply chain issues ease and COVID-19 potentially moves from the pandemic to endemic phase. 

Predictions, by their very nature, are built on a set of assumptions about what the future holds. In looking through the crystal ball for this upcoming year, there are simply too many weighty variables and incredibly consequential unknowns to confidently predict what 2022 has in store for the American economy. But the fundamentals in the housing market (low supply, low rates, and strong enough demand) would lead one to expect 2022 will provide another seller’s, and thus a builder’s, market. And, despite the incredibly consequential list of variables outlined above, it doesn’t seem like any of them are poised to undermine those fundamentals in 2022. 

That’s why we think this will be another good year for home builders. However, that doesn’t mean there won’t be challenges based on local conditions beyond construction delays. Specifically, the massive upward pressure on pricing has dramatically reduced the pool of qualified (or willing) buyers in some entry-level buying markets. That means builders who target first-time buyers may find themselves pricing their potential buyers out of the market. Eventually, this problem may move beyond the entry-level market, given how important it is for people to be able to sell their first home to move up and build their next home. But, for now, it doesn’t seem like that problem is likely to cause a big challenge given nationally just how low the overall supply is. 

Originally published Jan 12, 2022 4:00:00 PM under Industry Outlook, updated January 12, 2022

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