There's a reason homebuyers have struggled to purchase properties this year. Home prices have soared on a national level, and they don't appear to be slowing down.
During the third quarter of 2021, U.S. home prices rose 18.5% from the third quarter of 2020, according to the Federal Housing Finance Agency House Price Index. And last quarter, home prices were up 4.2% compared to 2021's second quarter.
Now the good news -- at least for prospective buyers and real estate investors -- is that inflated home prices shouldn't last forever. But will prices remain high in 2022? Here's what we know.
Will home price drop over the next 12 months?
Without a crystal ball, it's impossible to predict how home prices will trend in the course of 2022. But there's a good chance they'll remain high for a couple of key reasons:
1. Low mortgage rates
We're closing out 2021 with mortgage rates that are still sitting near historic lows. The Federal Reserve has already indicated that it will raise rates in 2022, and while the Fed doesn't set mortgage rates directly, it can influence them.
But still, even if mortgage rates climb modestly from their current levels, they'll remain competitive on a historical basis. And that means buyers will no doubt continue to clamor for homes in the new year.
Now if we hark back to high school and review the basics of supply and demand, we'll see that when demand for a given commodity is high, prices tend to increase. And because buyer demand should stay strong, home prices may not budge all that much from their current level.
2. Limited inventory
The U.S. housing market has been starved for inventory since the start of 2021. As of the end of November, there were just 1.11 million homes for sale, according to the National Association of Realtors, which represents a 13% year-over-year decline.
As mentioned, whenever the demand for a given product exceeds the available supply, prices can spike. In this case, the "product" in question is homes. And since inventory is unlikely to pick up all that much in 2022, prices could remain high.
Why won't inventory pick up? To be clear, it might -- we can't make that call. But a big reason it's been sluggish thus far is that homeowners have held off on selling due to pandemic-related concerns and general economic uncertainty.
The omicron variant has the potential to wreak havoc in both regards. An explosion of cases in early 2022 could force some restrictions and shutdowns, leading to an uptick in unemployment and a worsening of general economic conditions. And so there's a good chance that would-be sellers who have held off on listing their properties so far will continue to sit tight in 2022.
What should real estate investors do if home prices remain high?
As a real estate investor, you may be eager to add more income properties to your portfolio. But unfortunately, 2022 may not be the optimal time to do that.
While property owners are getting away with raising rents, you may not be able to command enough money from tenants to compensate for the inflated price you'll pay for a home. And so a better bet may be to look at ways to maximize the properties you already have. That could mean converting a property from a long-term rental to a short-term rental.
In time, home prices should come down from today's levels. But that may not happen in 2022, and that's something investors will need to be prepared for.