2022 housing market appreciation is expected to slow down as rates rise and investors step away, but plenty of buyers will remain.

• Mortgage rates are already beginning to see the volatility we expect over the next couple of months. The market waits on the Fed to begin pulling back support even as we watch rising COVID-19 cases continue to heavily impact large swaths of the economy.
• With a couple of months of slowing home value appreciation behind us, blending the estimates from the ZHVI with our dollar denominated FHFA HPI series shows monthly appreciation dropping from a whopping 1.8% in May to 1.5% in August.
• If the slowdown continues, we’ll clock an annual appreciation of 15.8% over 2021 and be on pace to hit a much more modest, yet still spicy, 9.8 percent over 2022.
• Home value appreciation numbers are highly dependent on source and the methodology used by the various research shops

Economists have rarely looked into the future with more uncertainty. During the early days of the pandemic, when crisis planning was in full swing, the reality of the situation was certainly unclear. Economists across the globe anxiously popped into each others’ webinars to make sense of what the economic shock and policy response would be. But once that response was outlined and we were in the midst of it, the extent of the insulation that the Federal Reserve and the housing finance apparatus could provide settled fears and housing markets charged ahead.

This winter the situation is different. That insulation is going to start going away. Persistent and painful inflation could force the Federal Reserve to pull back faster than planned, even as the pandemic continues to heavily impact large shares of the economy. That said, international uncertainty building due to China’s massive and manual restructuring could keep demand for U.S. government backed debt high, and mortgage rates low.

Either way, expect serious volatility in mortgage rates with an upward drift, a situation that could have a significant cooling effect on profit-motivated buyers.

A significant share of the demand over 2020 and 2021 came from more affluent buyers and investors seeking to capitalize on likely-never-to-be-seen-again low rates. But, even assuming interest rates rise only moderately into 2022, there is reason to expect the heat from these buyer types to be reduced next year.

Both affluent buyers and large investor types are able to source and move funds quickly and so are more likely to have already made their moves in 2020 and 2021. With much of that deep-pocket, early-mover demand already spent, we likely won’t see as many buyers motivated by portfolio optimization in 2022.

That said, there is one thing that economists seem to agree on. There will still be an overwhelming number of buyers motivated less by their portfolios and more by finding a new primary residence and moving on to the next stage in their lives. Those fundamentals, a massive generation aging into home buying and low levels of new construction for over a decade and a half, existed leading into the pandemic and still remain. But that doesn’t mean the affordability for first-time home buyers, and with it the strength of their demand, won’t be impacted by the extreme home value appreciation over 2021.

Despite time on market and other listing competition metrics remaining materially unchanged since the heights of summer, home value appreciation has already begun to slow — blending the estimates from the ZHVI with our dollar denominated FHFA HPI shows monthly appreciation dropping from a whopping 1.8% in May to 1.5% in August. (By the way, a monthly appreciation rate of 1.8%, if annualized over a full year, would yield over 24%.)

The ZHVI, whose numbers for October are currently available, show further softening over September and October. If these trends continue we’ll clock an annual appreciation of 15.8% over 2021 (on our blended metric) and be on pace to hit a much more modest 9.8 percent over 2022. What’s more likely, however, is the slow down itself slows down such that appreciation next year may still top double digits nationally.

While the pressure on price may be falling off as buyers hesitate to place bids they know they won’t be able to afford, time on market and percentage of listings with a price cut have eased only slightly into the winter months, typically a period when housing markets slow down more significantly. From those indications, 2022 will still be a market where buyers will need to be on their toes and looking for every competitive advantage they can get.