Will Home Prices Come Down in 2022?

Whether home prices fall will depend on several factors. Here's what you need to know.

There's a reason 2021 was a challenging year for home buyers. Property values sat at inflated levels throughout the year, making it difficult for buyers on a budget to enter the market.

Unfortunately, we're starting off 2022 in a similar boat. Home values are up on a national level, and if they're out of your price range, you may be banking on them dropping in the course of the year. But is that something you should expect?

In the absence of a crystal ball, we can't definitively predict whether home prices will come down this year. But here are the factors that are likely to dictate how home prices move.

1. Mortgage rates

Though mortgage rates have been higher in early 2022 than they were in 2021, on a historical basis, they're still quite competitive. While that bodes well for buyers in one regard, it can also be problematic from a home price perspective.

If mortgage rates remain low, the demand for homes could remain intense. And high demand often goes hand in hand with higher prices.

That said, many experts predict mortgage rates will climb in 2022. If they rise modestly, it may not impact buyer demand -- and, in turn, home prices. But if rates see larger-than-anticipated hikes, buyers may pull back, resulting in easing demand and lower home prices.

2. Housing inventory

Any time there's not enough of a given commodity to meet demand, prices tend to rise. Such has been the case in the U.S. housing market for the past year and change.

We're starting off 2022 with low housing inventory, and that's unlikely to change in the near term. Historically speaking, winter is not a popular or easy time to list a home.

If housing inventory picks up during the year, though, then it could cause buyer demand to ease. That could, in turn, lead to lower home prices.

A big reason prices have been sitting at such high levels is that buyers have been engaging in bidding wars to snag what limited inventory has been available. In a bidding war, two or more buyers duke it out over the same property, raising their offers in the process. Since bidding wars were common in 2021, home prices increased. If housing inventory picks up in 2022, bidding wars could become less frequent, leading to lower home prices.

3. The general economy

Right now, the economy is in great shape compared to where things stood a year ago. In fact, the national unemployment rate recently dropped to its lowest level since the beginning of the pandemic.

If the economy stays strong, it could prompt more people to sell their homes. That could, in turn, lead to a notable uptick in inventory that drives prices downward. But if things take a turn for the worse as far as the economy is concerned, then sellers might continue to hold off on listing their homes, thereby perpetuating the inventory shortage buyers have been grappling with for many months and keeping prices where they are.

Should you plan to buy a home in 2022?

If today's home prices are too high for your budget, then 2022 may not be the ideal year to buy. That's because we can't say with certainty that prices will come down in a meaningful way.

On the other hand, if you spend the better part of 2022 socking money away for a down payment on a home and taking steps to make yourself a great mortgage candidate, then you may find you're able to purchase a home later on in the year, whether prices come down or not. Your best bet, therefore, is to keep tabs on the real estate market, while doing whatever you can to improve your personal financial picture.