It’s never too early for predictions about next year, and a few news outlets didn’t disappoint this past week. Anne Sraders of Fortune opened up the discussion by outlining a number of predictions for 2022:

• A more buyer-friendly market is on the horizon.
• Buyers will likely have more housing supply to choose from.
• Don’t expect housing prices to drop.
• Expect 2022 to provide a more normal sales cycle and offer process.
• Expect mortgage rates to tick upward in 2022.
• The suburbs will continue to be the hottest markets in 2022.

Indeed, supply was strained during the pandemic, however, Sraders reports that housing inventory is beginning to tick upwards.

Source: Fortune

That doesn’t mean we will see a buyer’s market in 2022, according to Brandon Cornett of the Home Buying Institute. “Recent trends and forecasts suggest that the U.S. real estate market is slowing down a bit. Home sales, for example, have dropped measurably in recent months. But this probably won’t be enough to create a buyer’s market in 2022.”

Nathaniel Lee of CNBC adds to the predictions, noting that the market heading into 2022 will be more of a boom than a bubble. Lee quotes another CNBC correspondent, Diana Olick, as saying “We say bubble because we can’t believe how much prices have gone up…A bubble tends to be something that’s inflated that could burst at any minute and change and that’s not really the case here.”

Hari Kishan of Reuters reported last week that “Rocketing U.S. house price rises will accelerate more slowly in 2022, halving this year’s double-digit pace but still climbing much faster than experts predicted three months ago, according to a Reuters poll of analysts who said homes would get even less affordable.”

Source: Reuters

Starter homes

Speaking of supply issues, Uri Berliner of NPR reported recently on the acute shortage of entry-level smaller homes. According to Freddie Mac, as reported by NPR, a starter home is 1,400 square feet or less, and in 1982, 40% of newly constructed houses were entry-level. By 2019, that share fell to about 7%.

Ben Carlson of A Wealth of Common Sense penned an excellent analysis of the topic titled, The Death of the Starter Home? One chart is very telling of the current status of more affordable homes.

Source: A Wealth of Common Sense

That said, when discussing the argument surrounding the death of the starter home, Carlson adds:

“People can afford more home at today’s rates…Add in fewer homes being built, a touch of inflation, scarred homebuilders, HGTV messing with our expectations and it’s no wonder new home sales prices have risen over the past 20 years. This doesn’t necessarily mean the starter home is dead. It just means those looking for a new starter home at lower prices are going to have to adjust their expectations.”

According to recent Realtor.com data, there may be some reprieve on the horizon. Newly listed homes have been getting smaller over the past few months, “shifting the mix of inventory toward smaller homes compared to last year. Looking at the single family home category alone, the share of homes having between 750 and 1,750 square feet increased from 30.6% in August 2020 to 37.0% in August 2021, while the inventory of homes having between 3,000 and 6,000 square feet decreased from 23.9% to 19.3%.”

Update on jobs and supply shortages

As a result of the Delta variant, the improvement in employment gains we’ve seen over the past few months slowed significantly. According to the National Association of Home Builders (NAHB):

“In August, residential construction employment rose by 17,400, while non-residential construction lost 20,300 positions, reflecting declines in builders (-2,800), nonresidential specialty trade contractors (-9,200) and heavy and civil engineering construction (-8,300). Currently, residential construction employment exceeds its level in February 2020, while only 52% of nonresidential construction jobs lost in March and April have been recovered.”

According to Associated Builders and Contractors (ABC), the loss in nonresidential construction employment can be attributed to “supply-side bottlenecks” that keep harming the industry.

In commenting on this data, George Ratiu of Realtor.com notes that

“For real estate markets, continued gains in employment provide a solid foundation for demand. In a promising shift, markets are seeing a sustained boost in the number of homes for sale, with Realtor.com data finding a rising swell of smaller, more affordable homes. The influx of supply is helping moderate price growth, which is now down into single-digit territory following a year of record-setting pace.” 

On the supply side of the equation, lumber continues its plunge to normalcy with Lance Lambert of Fortune reporting that wholesale lumber prices peaked in May at $1515 per thousand board feet. Now, after falling for 13 consecutive weeks, prices sit at $533 as of Monday.

That said, with labor strains, mill layoffs, and the potential effects of Hurricane Ida, lumber prices may see price increases in the short term.