Chances of a Housing Market Crash in 2022 as Powell Calls for a Reset

The U.S. housing market was incredibly strong over the last two years. It was a sellers’ market amid a shortage of homes available for sale. Record low mortgage rates and fiscal stimulus provided by the Biden administration also led to a rebound in home sales at a time when inventory was limited.

However, over the last few months, we’ve seen signs of a slowdown in the U.S. housing market. What’s the 2022 prediction for the U.S. housing market and is it headed for a crash?

Josip Rupena, CEO of crypto mortgage company Milo, tells Market Realist, "In the short run, mortgage rates will remain volatile and continue to move around and likely settle out higher than they are today over the coming weeks."

Longer term, Rupena says borrowers could expect mortgage rates "1-2 percent higher over the next 12 months" as the Federal Reserve continues to increase interest rates. "If you are considering cashing out some of your home equity, it makes sense to do that sooner than later," he adds.

Understanding that consumers will be looking for other cost saving solutions, Rupena says, "We are looking at innovating through our product offerings and giving consumers the ability to make interest only payments that lower their monthly mortgage payments 20-25 percent vs. a loan that amortizes."

Speaking with reporters, Fed Chair Jerome Powell said that he is “not sure” how the rising rates will impact residential investment and home prices. The Fed raised rates by 75 basis points at its June meeting, the steepest increase since 1994.

Powell also said that the housing market is “tight” and admitted that house prices might continue to rise for some time despite rising rates. He said that homebuyers need a “reset.” Powell added, “We need to get back to a place where supply and demand are back together and where inflation is down low again, and mortgage rates are low again.”

Some of the housing market statistics point to a slowdown. U.S. housing starts have now fallen for two months. In May, both the housing starts and building permits fell more than expected and raised fears of a slowdown in the U.S. housing market.

At the same time, home completions have hit multi-year highs. At a time when the demand for housing is expected to come down amid rising mortgage rates (the 30-year fixed mortgage has topped 6 percent) and recession fears, more new home inventory would help tame the steep rise in home prices.

Realtor.com has toned down its 2022 predictions for the U.S. housing market in the revised forecast. It expects existing home sales to fall 6.7 percent in the year, which is steeply below its previous forecast of a 6.6 percent growth. Also, Realtor.com expects existing home for-sale inventory to rise 15 percent in 2022 compared to its previous forecast of a 0.3 percent growth.

Realtor.com maintained the 2022 single-family home starts forecast of 5 percent growth. Also, while it's forecasting a slowdown in the housing market, it expects the median house price appreciation in the U.S. at 6.6 percent in 2022, which is above its previous forecast of 2.9 percent growth.

Realtor.com said, “The change in financial conditions is the most dramatic driver of change in our revised outlook.” It also added that rising mortgage rates would knock off some buyers from the market, while others might see a sense of urgency to buy as mortgage rates are on an upwards trajectory.

The demand-supply imbalance combined with rising input costs pushed up home prices in the U.S. Now, all the bullish factors are unwinding. While the market is still tight, things should change towards the end of 2022. As more buyers drop the idea of buying a home amid economic uncertainty and high mortgage rates, the market should see a better demand-supply balance.

Also, the cost of construction of new homes should fall since raw material prices have started to taper down. Add the rising mortgage rates and a general sense of pessimism in the markets and it wouldn't be surprising if the housing market reverts towards being a buyers’ market sometime in 2023.

However, many experts are reluctant to predict when the market will shift again. Michael Gifford, CEO & co-founder of Splitero, tells Market Realist, "I wish I could predict the tipping point of supply and demand, but no one has that crystal ball. The reality is that there is significant pent-up demand in all markets, with supply slowly trickling out. The question is about seller motivation when it comes to dropping their price. Selling motivation is low in this market for most sellers as their next home is challenging to locate whether they are trying to buy or rent. We work with many sellers that avoid this uncertainty by accessing the equity in their home now."