After a year of earth-shattering home prices increases, real estate professionals are wondering — what’s next in 2022?

A November 2021 Zillow survey of housing experts asked which direction home prices will go in 2022. Compared to the prior year, home prices will:

  • decline, according to 41% of respondents;
  • rise, according to 41% of respondents; and
  • remain roughly level, according to 18% of respondents.

Notably, every respondent who expects home prices to continue to rise in 2022 also believes the pace of price rise will slow compared to the breakneck pace of 2021.

The average annual price increase expected by survey respondents in 2022 is roughly 7%. For reference, California home prices averaged a significant 18% above a year earlier in the low tier and 22% higher in the high tier, as of November 2021.

While most sellers will continue to expect the same rapid price increases of the past year to continue in 2022 — the effect of sticky pricing expectations — there are several factors which point to a slowdown ahead.

Home prices will fall

With experts evenly split on the future of home prices in 2022, real estate professionals are beginning to feel the pressure of uncertainty, and rightly so. Support is being rapidly withdrawn from the housing market, and the impact on home sales and prices is imminent.

Obstacles to home values in 2022 include:

  • rising interest rates, which have slashed buyer purchasing power 8% in the first two months of 2022 alone, translating to 8% less mortgage principal available to homebuyers today compared to at the end of 2021;
  • the ongoing jobs recovery, with over 700,000 jobs still missing from California’s labor force as of November 2021;
  • economic uncertainty stemming from global events and the most significant levels of inflation seen in a generation; and
  • the now-expired foreclosure and eviction moratoriums, along with the steady rise in forbearance exits, to increase inventory.

Lacking the support of falling interest rates, additional stimulus or income boosts, California home prices are expected to fall back in the second half of 2022.

Further, the long-term outlook for interest rates is a continued increase in rates — and thus a long, downward trend for buyer purchasing power. Unable to qualify for as much mortgage principal, homebuyers will continually weigh down home prices in the years to come. Higher interest rates will also put pressure on the broader economy, slowing growth in sectors other than housing and leaving the economy open to more frequent (though more mild) recessions.

2022 continues a volatile period for the housing market, with home prices on the brink of a meltdown. Real estate professionals can look ahead to the coming jobs recovery for the next stable period for home sales and prices, likely to arrive around 2024-2025.

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