How Will Inflation Affect the Housing Market in 2022?
Wendy Kedzierski
January 3, 2022 — Read in 3.8 mins · 762 words

How Will Inflation Affect the Housing Market in 2022?

When it comes to concerns about the economy in 2022, all eyes are on inflation. According to the Bureau of Labor Statistics, 2021 saw the U.S. inflation rate rise to 6.8% – its highest since 1982. Gas, food and housing all saw price increases. The cost of goods and services continues to rise, decreasing the purchasing power of our money. 

A number of factors have contributed to inflation, including supply chain issues due to worker shortages and disrupted manufacturing.  

Typically, inflation affects real estate in a number of ways:

  • An increase in property values
  • An increase in interest rates
  • An increase in rental rates

Reflecting on 2021

So how did inflation affect the housing market in 2021 and are there any signs of a rebalance?

“It’s still kind of wild out there!” according to Steve Salvatore, Loan Consultant with Day 1 Mortgage. 

Steve says that while August and September saw a “pause” in the 2021 real estate buying frenzy, U.S. home prices surged again in October, climbing above 18 percent from a year earlier.

The housing market continued to boom in the wake of the previous year’s coronavirus recession, and the end 2021 continued to bring high prices, high demand and low inventory.

And while there’s a perception that the increase in prices will slow down – that the DMV region simply cannot sustain this trend – Steve isn’t so sure this is the case.

“Inventory is still low,” says Steve. Since supply and demand regulate housing prices, at this point, it looks like housing prices will continue to increase.

“Housing inventory dropped in 2019 to a level that hadn’t been seen since 1999. And then in 2020, levels dropped to below the level of 1982 – which is when they first started keeping track.”

The housing market stayed strong largely due to the limited supply of homes on the market, rock-bottom mortgage rates, and pent-up demand from consumers who had been penned in by the pandemic. 

Looking Ahead to 2022

But will higher interest rates drive home prices down?

“I don’t see anything that is going to slow us down in terms of the housing market. We will probably see a fluctuation in interest rates, but we can sustain it here (in the DMV region), particularly in the Arlington – D.C. area.”

Further, Steve says the DMV area has been undervalued for a long time.  

“We have such a good mix of jobs: tech companies, tourism, the federal government and the associated government contractors. Not to mention you can’t build too high in D.C.” (Without high rises to accommodate a growing population, housing supply and demand continue to be unbalanced.)

“I think we could easily go into the 4’s (interest rates) without a problem.”

And just like in 2021, buyers’ offers will have to be sweeter than ever. 

“When you find a house, you’re going to be moving at 250 miles per hour,” says Steve, who now has to not only guide consumers through the process of completing a loan application, but also through the increasingly competitive art of winning a deal.

Going in strong and going in fast are two critical factors which can be achieved in several ways:

  • Buyers must have everything required on the loan application complete. There can be nothing outstanding that will impede the speed of the process.
  • Offers should be aggressive and early. By turning in a fantastic offer well before the offer deadline, a buyer will make it hard for a seller to turn down. 
  • Waive as many contingencies as possible. Think each one through carefully, but waiving inspection, appraisal and/or financing contingencies will make your offer more appealing.
  • Provide an escalation clause. To strengthen the possibility that the seller will pick your offer over all others, detailing how you will increase your offer if a higher offer comes in shows the seller you’re serious.
  • Be prepared to compensate for a possible low appraisal. If you don’t have the cash readily available, you should be prepared to secure gift funds, borrow from a 401K, etc. This flexibility gives you the option to go from $40,000 over asking price to $50,000 (or more) over and might be the difference between being in first position and getting the deal or losing it.

The Bottom Line

Brace yourself. It doesn’t look like real estate price increases will abate any time soon. Although strong inflation may affect homebuyers’ budgets, housing is still regarded as a long-lived, durable asset.

Contact us to connect with an agent about buying or selling in 2022.

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