Ask Brian: Will 2022 be Another Tough Year for Home Buyers?

Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].

Question from Roy in Iowa: Hi Brian, I don’t have to tell you how tough it’s been for homebuyers in 2021. I’ve been at it since June. Out there scrabbling to find a home for my family of four. Watching as prices shoot up every week, losing three bidding wars, and I have nothing to show for my efforts. I’m hoping you have something encouraging to say about 2022. Should I keep searching? If I do, is there anything that I should do differently next year?

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Answer: Hello Roy. I wish I could share a more optimistic insight for 2022 but the overwhelming view is that 2022 will be another tough year for buyers. However, the challenges will be a little different. You can expect price hikes to be smaller but that doesn’t mean the mortgage payment you could lock in January will be the same as the mortgage payment available in July. Still, the crystal ball does show that the market in 2022 should be a tad gentler. Nonetheless, chasing the homeownership dream will still require strategy and stamina.

The market is going to continue to be starved for inventory but with some upside to supply. Demand will remain so high that a slight increase in inventory will not stop price increases or bidding wars in most places. But there will be fewer multiple offers. That should slow skyrocketing home prices. The National Association of Realtors projects home prices will increase 2.8% in 2022, far less than the estimated 14.7% gain in 2021. But the crystal ball is a little cloudy and that is the low-end prediction. Others, such as Fannie Mae predict a 7.4% increase. Freddie Mac says 7% and the Mortgage Bankers Association is leaning towards a 5.1% bump. Even at the low end, a 2.8% increase to a $350,000 house means it will jump to about $359,800 by the end of 2022 and the high end of 7.4% would mean $375,900 by this time next year.

Although slowing price increases sound welcome, the kicker is that higher interest rates need to be factored into mortgage payments for anyone not making an all-cash offer. At least we are only looking at small decimal point changes to mortgage rates. Anyone seriously looking at the impact of mortgage rates on their monthly payments will need to run their own numbers but is here is an example of what people with a decent credit rating can expect. Starting with a baseline 3% interest rate at the end of 2021, the National Association of Realtors forecasts the 30-year fixed mortgage rate to rise to 3.7% in the coming months. The Mortgage Bankers Association looks for an increase to 4%, and Fannie Mae and Freddie Mac project the 30-year fixed will average 3.3% and 3.5%, respectively. Here are how monthly payments workout for a $350,000 house at the beginning of the year at 3% and on a $375,900 house at the end of the year at 4% (the two extremes). Both are 30-year fixed mortgage payments only and do not include property taxes, insurance, HOA fees, etc.

Beginning of 2022 for $350,000 at 3% = $1,476 monthly payment.

End of 2022 for $375,900 at 4% = $1,795 monthly payment.

A $319 variance in predicted monthly payments.

Roy, you didn’t mention your age, but I’m going to give a few words of encouragement that the Millennial Generation might be able to use in 2022. For instance, the examples above are for loans at the full amount shown. Down payments lower the amount loaned and therefore the monthly payment. Naturally, the higher the down payment, the lower the monthly payment. But to start with, we all know that buyers should be pre-approved and have a solid list of features they can’t live without so they can be decisive and move quickly when they find the right home. A good strategy is targeting homes listed below the maximum price they’re willing to pay in anticipation of making an above-list offer. Have a solid plan before making any offer. Know the maximum offer you’re willing to make, how the offer will be structured, and the terms you’re willing to negotiate. You’re likely to be near the maximum offer you can make, so know what your hard limits are.

You want a highly professional real estate agent with a deep knowledge of the market that you are looking in. Still, be just as attentive as your agent. Network with everyone that will listen to you, so they know that you are house hunting and the kind of property you’re looking for. Give yourself a long lead time. It could take a week, but it could just as easily take several months.

Think of optional places where you might be able to live. If you work full time from home or even mostly from home, you probably don’t need to be close to the office. You should be able to significantly widen the range of neighborhoods where you are looking to buy. Working from home also means needing more space for a home office. This can open the possibility of buying new construction which is expected to focus mostly on houses larger than 2,000 square feet.

Roy, hang in there. The coming year will not instantly turn into a buyer’s market, but the market is beginning to change. Interest rates will be the biggest change in 2022. However, 3.7% is still a low rate and worth locking in mortgage payments for the next 30 years. Prices won’t be going down anytime soon.

What’s your advice for homebuyers in 2022? Please comment.

Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].

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