Will the Housing Market Crash in 2022

Rising prices have been a hallmark of the pandemic-era housing market.

While many homebuyers are jumping on low interest rates, others believe the market is a bubble waiting to burst. Some are predicting a 2008-like crash and a sudden collapse of real estate prices.

Will the housing market crash in 2022?

Risky lending is not fueling home prices

While it may look similar on the surface, the current housing boom is different from the early 2000’s in several ways.

First, the early 2000’s featured eyebrow-raising loan options, such as NINJA loans (no income, no job or asset verification). Another popular program was the “Stated Income” loan in which the borrower merely stated how much they made. An applicant claiming they made $10,000 per month as a manager at Jack In The Box was not uncommon.

In issuing these loans, lenders relied heavily on the applicant’s credit score (if even that). They did little else to ensure the borrower's ability to repay the loan.

Using NINJA loans, people bought homes that they were not able to afford. A wave of loan defaults contributed to the 2008 crash.

In the aftermath of the downturn, new lending regulations in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act all but eradicated ultra-risky loan options. Today, home loans are approved with much higher standards. Everything is documented.

Homebuyer demographics suggest continued demand

Another factor in the 2008 crash was an oversupply of inventory. Gen X is a significantly smaller generation than baby boomers, which caused the population of homebuyers to decrease. In the following infographic, the orange trough is Gen X. This small generation was frantically trying to absorb the oversupply brought on by the preceding boomer wave.

This oversupply devalued home prices, and caused many borrowers to owe more than their homes were worth.

Today, the opposite is happening. Millennials (yellow bars) are a larger generation than Gen X or even boomers, and are just entering their prime homebuying years. For the next several years, the growing homebuyer population will fuel demand and, in turn, the value of homes.

In order for the housing market to crash in 2022, demand would have to suddenly drop off. That’s very unlikely given the wave of millennials headed into the market.

Rising mortgage rates will calm price increases to healthier levels

Low interest rates have played no small part in fueling housing demand and the 2020-2021 run-up in home prices. This is largely due to asset purchases by the Federal Reserve designed to stimulate the economy as it recovers from the COVID-19 economic recession.

In this low mortgage rate environment, homebuyers are able to offer a high purchase price because they’re spending less on interest, which, in turn, pushes home prices upward.

At some point, the Fed will reduce its purchases and interest rates will rise – the only question is when. But it’s unlikely this correction will cause the housing market to crash in 2022.

The latest forecast from Freddie Mac -- a major housing authority -- suggests the average 30-year fixed mortgage rate will hit 3.7% percent by July 2022, up about 0.9% from current levels. While it sounds significant, it only amounts to around $150 per month on a $300,000 mortgage.

It’s not trivial, but it’s likely less than rent will rise during the same period. Real estate data company CoreLogic reports that single-family detached home rents have already skyrocketed 10% this year.

And the bottom line is any mortgage rate under 4% is still historically very low. Americans have grown accustomed to sub-3% interest rates. However, just a few years ago it was thought sub-4% rates were unachievable.

The inevitable rise in interest rates may deter enough homebuyers to slow increasing home prices. However, it’s unlikely prices will fall, let alone crash the market. Years of sustained demand are on the horizon.

Housing production has not kept pace with population growth

Rising interest rates may have a cooling effect on demand, but the incoming wave of millennial homebuyers is a much greater force.

Peak homebuying age is typically 30-35 years old. Due to a historic population boom, the number of people in this age range will keep growing for the next eight years. This all but guaranteed demand from millennials entering the market is perhaps the single greatest reason why the housing market won’t crash in 2022 or for several years after.

Millennial homebuyers alone are enough to sustain demand and growth in the housing market. But they are not the only factor. The market is also facing an ongoing supply shortage of homes for sale due to decades of underbuilding.

After the 2008 market crash, homebuilding slowed to a crawl and still hasn’t regained its former pace. There were more than 1.6 million single-family homes completions in 2006. That number dropped to just over 520,000 in 2009 and by 2020 was still below a million single-family homes per year.

You can expect this shortage to persist for several years. Land, material, and labor are difficult to come by, especially in the aftermath of a pandemic and economic recession. Homebuilders may wish to accelerate their pace, but in the current conditions, they physically can’t build homes fast enough to satiate demand.

Tension between millennial buyer demand and lagging supply will keep upward pressure on home prices in the near- and mid-terms.

What about the 'foreclosure wave'?

You may have seen the headline “Something big is about to happen in the housing market” from Fortune regarding an ensuing wave of foreclosures.

Those claims are likely sensationalized and bear little foundation in reality.

It’s true that the federal foreclosure moratorium ended on July 31 and the forbearance program will follow suit on September 30. And foreclosures did play a major role in the 2008 housing market crash.

However, the writer concedes that today’s circumstances are very different and a foreclosure crisis is unlikely.

The major difference is that many homeowners were underwater in 2008 (meaning their home value was less than their mortgage balance). Today, homebuyers are benefitting from record home appreciation. Instead of entering foreclosure, struggling homebuyers can choose to list their home in a seller-friendly market.

That wasn’t as much of an option in 2008.

There’s also a wave of mortgage relief programs from the Biden administration, including payment reductions, term extensions, and deferred interest payments. These programs have the potential to further stave off foreclosures and keep people in their homes.

While there may have been a wave of foreclosures forming, the hot-housing market and preventative measures by the federal government are in position to absorb it.

Will home prices fall?

People waiting for the real estate market to crash and home prices to fall may be waiting for a while.

Foreclosures, rising interest rates, and increasing inventory will certainly weigh down rising home prices. But there’s little to suggest home values will go down in the near future. It’s more likely that home appreciation will slow from break-neck double-digit increases back down to 3-5% per year, the historical average.

The incoming class of millennial homebuyers is expected to fuel demand for nearly a decade and keep the housing market humming along.

Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.