(CNN) – If you’re one of the many potential buyers who were shut out of the real estate market last year, you may be hoping for better luck in 2022.
The good news is that you probably won’t see the jaw-dropping jumps in home prices seen last year. But prices are expected to rise further and mortgage rate hikes are also expected.
The housing market saw the strongest performance in 15 years in 2021, sending home prices skyrocketing. Prices soared nearly 20% in the third quarter from a year earlier, according to the Federal Housing Finance Agency.
The fierce competition and astronomical prices gave many buyers pause.
Heading into this year, only 26% of consumers thought it was a good time to buy a home, according to Fannie Mae’s Home Buying Sentiment Index for December. This is a sharp drop in sentiment from a year earlier, when 52% thought now was a good time to buy.
One of the main reasons prices have skyrocketed is that there are so few homes on the market. The housing stock hit a historic low in December. And, as long as there are far more buyers than sellers, competition will remain fierce and prices will rise.
“Even though demand remains strong, a majority of consumers clearly have reservations about buying a home at current prices,” said Doug Duncan, senior vice president and chief economist at Fannie Mae.
But that hasn’t stopped people from looking for a house. Here’s what to expect if you’re one of them.
House prices will rise, but not as fast as last year
Home prices are expected to continue rising this year, but not at the blistering pace of 2021.
“This kind of price increase was a shock. ‘Unprecedented’ isn’t strong enough. It was crazy,” said Skylar Olsen, managing director and senior economist at Tomo Networks, a buying platform for mortgages and homes focused on buyers.
The median home price was $346,900 in 2021, up 16.9% from 2020, and the highest on record, according to the National Association of Realtors.
A panel of economists convened by the NAR predicts median home prices will rise 5.7% over the coming year, while a panel of housing experts polled by Zillow expects home values increase by 6.6% in 2022.
But what happens next will largely depend on how buyers and sellers react to market developments.
“If buyers ultimately balk at unaffordable prices, sales volumes could plummet,” said Jeff Tucker, senior economist at Zillow. “But if homeowners finally start listing their homes en masse, we could see a sales bonanza, slowing the pace of price appreciation.”
Mortgage rates will rise
Already in the first weeks of the year, the average 30-year fixed rate for a mortgage loan jumped considerably, reaching the highest rate since the start of the pandemic in March 2020.
This upward trend in rates is likely to continue, but not necessarily at the pace seen over the past two weeks.
“We expect interest rates to rise this year, which has a direct impact on families’ affordability and their ability to finance a home,” said Jeff Ruben, president of Wilmington Savings Fund Society Mortgage. “We don’t think this will be a situation where it stifles the home buying market, but we do expect rising interest rates to dampen activity a bit.”
The 30-year fixed rate mortgage averaged 3.56% last week. The average was 2.77% at the same time last year.
Inventory will increase, but so will the number of buyers
While the availability of homes for sale fluctuates often, the past year has seemed to be on the ebb.
“The last 18 months have been out of control – every time you turn around, prices are at record highs or inventory is at an all-time high,” said Mike Miedler, president and chief executive of real estate firm Century 21. “We have lost the cyclicality of the market.”
But this year, the housing market is expected to return to its normal seasonal cycle, with more homes coming on the market in the spring and then declining throughout the summer. But competition will remain stiff: Experts say buyers – many of whom have been bidding on homes since last spring – will continue to pour in, at least for the first part of the year.
“Coming into the spring, you’ll see demand will be strong, driven by rising interest rates,” Miedler said. “You will see people who have been waiting on the sidelines – when they see an increase in stocks, they will come back to the market.”
Some agents say a few buyers start early looking now. The problem is that there is not much to see.
At the end of 2021, inventory was at an all-time low, with just 910,000 homes available for purchase nationwide, according to the National Association of Realtors.
The problem is even more pronounced in working-class neighborhoods.
Jennifer Branchini, a Compass agent, was working with a couple looking to buy in Pleasanton, Calif., in the Bay Area, where there are currently just under 20 homes on the market.
“If you only have one property that comes on the market around the median price of $1.3 million, that attracts all the buyers,” she said.
She has seen prices rise so much during the winter months that she has advised some customers to simply put their search on hold.
“When I look at the sale price of certain homes, I’ve said to my clients, ‘I can’t even follow that number for you guys,'” Branchini said.
Homes will continue to sell quickly
Those looking to buy will need to act quickly. Many houses have concluded a contract within days of their first registration.
Last summer, homes took an average of just 17 days to sell, according to the National Association of Realtors. But it depends on the price. Even in November, which was relatively slower, homes priced between $250,000 and $500,000 sold on average in 10 days.
In the greater Washington, DC area, Gail Chisholm, an agent for Compass, said agents often put a home on the market on a Thursday, let buyers view it on the weekend at an open house, then request that bids be submitted by Tuesday evening.
“It’s going very fast, there’s definitely buyer fatigue,” Chisholm said. “If you find the house you think is your dream house and you bid $150,000 or more, ask and forfeit all the possibilities and you still don’t get it? And you’ve lost five houses from that way and paid $500 in pre-inspections each time? I have buyers who have taken a break. But many still need to find homes.”
In highly competitive markets like hers, she said, the baseline for buyers to be competitive is to include an escalation clause and an escalation cap in their bid, which specify to what extent they are willing to exceed the next closest offer, up to a specific amount.
Beyond that, it exposes all the levers that buyers can use to adjust the offer to their risk tolerance.
“It’s usually the deal with the least contingency, the highest escalation cap, the most money down, and the most fit for the seller’s needs that wins.”
In such a competitive market, buyers need to come with their mortgage agent and team in place and be ready to make decisions, Olsen said.
“If you’re in the search process, new listings come in, but they sell out really fast,” she said. “Your search for a house is a job.”
Still, Olsen said she fears the pressure and fatigue could lead buyers to make rash decisions they might regret.
“I’m so worried about people buying out of desperation only to end up winning a bid and not buying at a price they can sustainably afford,” she said. “Buy a house that fits well.”