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Zillow’s outlook for 2022: Will housing affordability slow demand?

Here's how record-low inventory plays a role

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This article is part of our HousingWire 2022 forecast series. After the series wraps, join us on February 8 for the HW+ Virtual 2022 Forecast Event. Bringing together some of the top economists and researchers in housing, the event will provide an in-depth look at the predictions for this year, along with a roundtable discussion on how these insights apply to your business. The event is exclusively for HW+ members, and you can go here to register.

An unstoppable force will meet an immovable object in the U.S. housing market this year, and we’ll find out which one wins.

Housing entered 2022 riding high on several superlatives: the highest-ever annual price appreciation, the lowest-ever active inventory and the fastest monthly rise in mortgage rates since 2016.

The biggest question for the year ahead is whether the immovable object of this market’s affordability struggles can slow the unstoppable force of demand enough to alleviate the inventory shortage that has fueled price growth since June 2020.

Zillow’s answer: price growth won’t slow much, at least not nationally. Our forecast is for home values to rise 16% from December 2021 to December 2022. Price growth during the pandemic has been astronomical, but it has not yet put homeownership out of reach for the bulk of would-be homebuyers around the country, so Americans will continue to bid against each other for the scarce supply of homes on the market.

One of the main headwinds for buyers — higher mortgage rates — will also dissuade some sellers who want to avoid paying more interest on their next home purchase. That could keep supply limited even as demand begins to slowly slacken.

Drilling down geographically, we do expect more regional divergence in price trends. Some of the least affordable markets, like Seattle and San Francisco, are likely to see price gains slow down sharply as higher mortgage rates make homeownership increasingly unaffordable relative to renting or moving elsewhere.

That would echo market trends in 2019, following the last major cycle of rising mortgage rates. But in more-affordable regions that have boomed during the pandemic, higher interest rates will offer little to no resistance.

That means home shoppers should continue to expect stiff competition and even bidding wars in the hottest markets. The most competitive markets of 2022 will again be in the Sun Belt, including Tampa, Jacksonville and Raleigh.

Homebuyers continue to flock to Sun Belt markets because of their relative affordability and weather that permits year-round outdoor living, especially as more people are able to work remotely and may not need to live near their employers in other traditional job centers.

While deteriorating affordability will only dissuade a portion of would-be buyers, many of them will divert instead into the single-family rental market. More space is a coveted feature during the pandemic, whether that’s a yard for the dog or an extra bedroom for a home office or a growing family. Many younger Americans in the market for a bigger home will start with a rental, until they can save up for a down payment in today’s daunting purchase market.

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