Home Prices Soared Almost 19% in 2021. But Here's Why 2022 Could Be Different

Homes got quite expensive over the past year. But values could start to drop in 2022.

There's a reason buyers have struggled to purchase homes since mid-2020. Home prices have risen steadily over the past year and a half, making it difficult for many everyday buyers to find an affordable place to purchase.

In the course of 2021, home prices rose 18.8%, according to the S&P CoreLogic Case-Shiller U.S. National Home Price Index. That's the highest increase in 34 years of data. And it's much higher than 2020's 10.4% annual gain.

While home prices rose substantially on a national level, certain regions saw more significant gains last year. Those include the South and Southeast, both of which were up more than 25% on an annual basis.

But while home prices may be sitting at elevated levels right now, they could start to come down in 2022. And the reason boils down to buyer demand.

Will homes get more affordable?

Last year, many housing market experts predicted an uptick in home prices in 2022. But that was before mortgage rates started rising at a faster-than-anticipated pace.

On Dec. 30, the average 30-year mortgage rate was just under 3.4%. As of this writing, the average 30-year loan is hovering around 4.5%.

That's a significant jump that many experts weren't prepared for. Neither were home buyers. If rates continue to climb, it could lead to a serious degree of buyer pullback. Once that happens, home prices could start to decline in a meaningful way.

To be clear, there's reason to believe mortgage rates will climb in 2022. The Federal Reserve recently announced the first of many rate hikes this year. Now, the Fed doesn't set mortgage rates, or any consumer interest rates, so it won't dictate how much money you earn from your savings account or what you'll be charged to take out a personal loan. Rather, the Fed is in charge of establishing rates for short-term borrowing among banks.

That said, the actions of the Fed tend to influence consumer interest rates. If the Fed has plans to hike up its rates, those looking to sign a mortgage should expect to pay more to finance a home.

That's clearly not such a great thing. But if it results in a major drop in buyer demand, it could help create a scenario where home prices start to fall to more moderate levels -- or at least stop climbing at such a rapid clip.

What about housing inventory?

The number of homes that hit the market will also dictate how home prices trend this year. In 2021, buyers had to grapple with record-low inventory, and right now, the situation isn't much different.

If more sellers opt to list their homes in 2022, that should also help ease buyer demand, driving home prices in a more affordable direction. But whether listings pick up in the course of the year is yet to be determined.

However, we should have some clues pretty soon. Spring is typically the most popular season for new real estate listings. If we start to see an uptick in supply over the next few months, it could bode well for the rest of the year. If we don't, it could be a sign that buyers are in for yet another year of staggeringly low inventory. That could mean another year of inflated home prices after all.