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Supply Constraints, Inflationary Impacts, and the Housing Market

It was the best of times, it was the worst of times. Yes, I am talking about the housing market in 2021.  

For those buying homes, times were tough. A number of factors led to housing inventory dropping to historically low levels. In addition, inflation drove the cost of homes up. Homes that were available were expensive, and those who engaged in the buying process often found themselves engaged in a bidding war in which the buyer with the most cash won.

For those selling homes, the same factors allowed homes to be sold for record amounts and in record times. The median home sales price in 2021 increased by almost 17% from where it stood in 2020, marking the highest increase since 1999. 

In the early months of 2022, many of the conditions that impacted the market in 2021 have continued to play a role. However, there are also some new developments that promise to affect the market.  

How High Inflation Is Impacting Housing Markets  

The only thing that seems certain about inflation in 2022 is that it will be a top concern for businesses and consumers alike. While the U.S. Federal Reserve is taking steps to bring inflation down, some economists are predicting that the Fed’s efforts will do little to impact the high prices that consumers are facing this year. 

Most notable for the housing market are the Fed’s plans to raise interest rates in 2022. While the Fed has hinted at as many as three rate increases, with the first coming as soon as March 2022, some experts are now predicting as many as seven increases in interest rates during 2022.

Buyers who plan on purchasing a mortgage should be encouraged to move quickly to avoid the added costs of higher interest rates. However, higher rates could also mean some prospective buyers are priced out of the market, which could drive down home prices. 

Should inflation continue to rise despite the Fed’s efforts, it could create situations that offset the impact of the rise in interest rates. For example, if inflation drives up the cost of renting a home, it could drive consumers into the housing market. Also, if inflation drives up wages, the increased expense caused by higher mortgage rates may seem manageable to those shopping for homes. 

Those looking to buy new construction should expect to pay premium prices as long as supply chain issues continue to make building materials scarce and costly. In 2021, the average cost of new construction homes rose by nearly $36,000.

How Supply Constraints Are Impacting Housing Markets  

While a recent survey reveals that there could be more homes on the market in 2022, buyers should continue to expect to be house hunting in a seller’s market. Because of the historically low inventory in 2021, many of those who were shopping last year are still shopping this year. Those just moving into the market will most likely continue to see a lot of competition for available houses, although a rise in interest rates might mean fewer speculative buyers.

Those in the mortgage industry may continue to be affected by the impact of low inventory, which often results in available homes going to cash buyers. Reports showed that 2021 was an especially difficult time for first-time home buyers, with many of them setting their sights on 2022 as the year to get into a home. Should the market prove more penetrable for first-time buyers this year, it could mean an increase in mortgages, especially FHA loans. 

Homeowners choosing to upgrade their current homes, rather than move into an upgrade, also could have an impact on the mortgage industry should those owners look to refinancing mortgages as the means for funding home improvements. 

Another factor that could mitigate the impact of supply constraints is the increased flexibility that many remote workers are enjoying as a result of the COVID-19 pandemic. Home shoppers that find themselves in an especially hot market may be able to find more affordable options in other cities while being able to take their remote work with them.

Overall, homebuyers may be better equipped to participate in the home-buying process in 2022 after learning from the difficult market conditions in 2021. For those guiding buyers, it will be important to communicate that options are limited, competition is fierce, and quick decision-making is important.

About Author: Bryan Cannon

Bryan Cannon - 2.21.2022
Bryan Cannon, CFP®, is a seasoned stock market technical analyst with over 25 years of investment and financial planning experience who closely follows overall market trends, market conditions, and specific equities. He has recently been featured in reports by US News & World Report, Investors Business Daily, CBS News, Yahoo News, Fortune, and TheStreet.com. He serves as the host of Markets ‘N5, a bi-weekly video series focused on analyzing market trends based on technical analysis.

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