Reviewing Housing Market Predictions for 2022

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As I begin to collect my thoughts on what might happen next year, I like to look back at my predictions for the previous year to see how I did. It’s helpful to look at what I’ve done right and learn from what I’ve done wrong to become a better investor.

I am not a professional forecaster and do not maintain my own economic models. But as an analyst and investor, I study tons of data to form a thesis about what is likely to happen in the coming months and years. The point is not to do everything right, that’s impossible. The data is retrospective and we can never say for sure what will come next. The point is to understand the most likely scenarios and form a thesis about the economy that allows decisions to be made with confidence.

I create a lot of content and update my thesis regularly as new data comes out, so I don’t have a specific “prediction” for last year, but let’s look at some of the themes that made up my 2022 thesis.

A tale of two halves

In January 2022, I wrote, “I don’t think the dynamics of the housing market will change too much in the coming months. Demand is still strong, supply is still incredibly low, and prices will likely continue to rise…Ultimately what happens in the second half of 2022 is more of a question mark for me. My estimate right now is that the cooling will lower year-on-year appreciation to 2% to 7% by the end of the year.”

A big part of my thesis last year was my strong belief that 2022 would be “a tale of two halves” for the national housing market. We knew the Fed wouldn’t start raising rates until March and I thought given the seasonality of the real estate market that price appreciation would peak in the second quarter and then cool off in the second half of 2022 .

Overall, I think I nailed the timing of the market change. It appeared that home prices in many markets peaked in June (while others continue to grow) and are now experiencing month-over-month declines (which is different from last year, which is how I make my prediction). The change happened right in the middle! The most recent weekly data from Redfin shows year-on-year appreciation around 6%, which is right in the range, but we’ll just have to see if he was right about 2-7% in the end.

The Fed’s playbook

In November 2021, I wrote: “If rates rise quickly, it could cause a shock to the system and house prices could fall back. But, the Fed probably won’t. They will probably try to raise rates as slowly as possible to allow the economic expansion to and wage growth offset the impacts of rising rates.This is what happened after the Great Recession, which was one of the strongest periods of housing price growth in American history, despite the rate hike That said, if inflation stays high for too long, or even begins to accelerate, the Fed could be forced to raise interest rates faster than it wants, which could hurt housing prices.”

I think I got the logic right here, but with a caveat (more on that below). I think the Fed’s intention in late 2021 was to follow their old post-Great Recession playbook and raise rates slowly. I believed it because they said they would!

This wasn’t exactly a hot take. But I did recognize the real possibility that the Fed could be wrong about inflation and could be forced to break with its post-Great Recession playbook and raise rates quickly. And as we all know now, that’s exactly what happened.

Mortgage rates

While I recognized that the Fed might be forced to raise rates quickly, I’ll be honest, I didn’t think interest rates would rise as quickly as they did, as much as they did. I thought supply improvements would help moderate inflation sometime in Q1 or Q2 2022 (although increased money supply and strong demand would keep inflation relatively high), and then the most likely course for the Fed was to follow its 2009 playbook and raise rates gradually.

But that’s not what happened. Instead, blockades around the world persisted, and Russia’s invasion of Ukraine caused even more supply problems. These events, along with increased money supply and strong demand, made the CPI higher than I thought it would go. It remains stubbornly high today, with mortgage rates hovering around 6.25% at the time of writing.

As for mortgage rates, that’s where things went off the rails for me. On November 21, 2021, I posted this on Instagram (I’m @thedatadeli if you don’t follow me):

Wow! My eyes burn just looking at it. When I can’t fall asleep at night, it’s this post that haunts me.

To be fair to myself, this was posted before the Fed announced three rate hikes in 2022 and we were flying blind, but I thought it would give you a good laugh at my expense. And at least I was wrong a little less than Realtor.com, CoreLogic, and Redfin.

But to be honest, even after the Fed announced three rate hikes in 2022, I still didn’t think we’d have rates as high as they are today. I thought we would still end 2022 at around 5%. Given that rates are around 6.25% at the time of writing, I think it’s safe to say that I’ve missed a lot on this one. I knew rates were going up to a more “normal” level, but I just didn’t think the Fed would be as aggressive as it has been. I expected inflation to come down sooner, not because of Fed action, but because the supply chain would open up. That didn’t happen, and the Fed is raising rates with limited success in containing inflation.

Given this, I see more downside risk to the domestic housing market than we did in early 2022. The decline in affordability that accompanies this rapid rate increase will weaken demand and put downward pressure on prices . It’s hard to say what will happen from here, but I still think a “crash” (drop of 20% or more) is not the most likely scenario domestically, but some markets could see crash-level declines.

The X factor of the inventory

As we entered 2022, inventory (the number of homes on the market at any given time) was historically low. When inventory is very low, it indicates that a seller’s market is likely to see price appreciation. And indeed, that’s what we saw in the first half of 2022.

He knew that as rates rose, affordability and demand would fall, usually sending inventory soaring. But inventory isn’t just about demand. It is also about how many houses are for sale. There is a lot of salesperson psychology to consider. Most people don’t want to sell their home for a loss, so in a correcting market, many sellers choose to wait for the correction. I wrote about this idea back in May if you want to understand more.

I honestly wasn’t sure what was going to happen in the second half of 2022, which is why I considered it the X-factor that would ultimately determine whether the domestic housing market remained slightly positive or negatively skewed at the end of the year. I landed on the side of “slight modest year-over-year appreciation” because I was skeptical that we would see inventory reach pre-pandemic levels, which turns out to be correct. Whether my price prediction is correct remains to be seen.

But the simplicity of this nationwide chart betrays what’s really happening in the market: The housing market is splitting. Different metros are seeing very different inventory dynamics.

Just look at the difference in active listings between Austin and Boston.

In Austin, active listings are up 60% year-over-year, indicating a rapid shift from a seller’s market to a buyer’s market. It’s pretty easy to see prices going down in Austin.

On the other hand, we have Boston, where active listings have been declining! It’s still a seller’s market here. Prices could still moderate, but on a much smaller scale than in Austin.

So inventory is really becoming a major X-factor! We have yet to see it all, but it’s definitely the number one thing I’m watching these days.

conclusion

Given the complexity of the economic climate in 2022, I think my thesis has held up pretty well so far. Of course, I wish I wasn’t so far off on mortgage rates, but as I said above, the point of developing an investment thesis is not to be right about everything. It’s about formulating an educated understanding of the market that helps you make informed investment decisions. In this regard, I am satisfied with my 2022 thesis because my overall understanding of the market was good and allowed me to make sound investment decisions.

I locked in low-rate financing on long-term fixed-rate loans, became more focused on large multifamily investments to take advantage of long-term supply constraints, and underwrote deals with little or no market appreciation in the coming years , just to be conservative.

As we approach another year of uncertain economic conditions, I encourage all of you to start thinking about your investment thesis for 2023. Take time now to take stock of the economic climate and changing market dynamics. Think about what might happen in your market next year and how you can make sound investment decisions based on the realities on the ground. How will high rates affect inventory in your area? Which asset classes will offer good returns? How do you protect yourself from a potential increase in unemployment rates?

You should not be afraid of these conditions as long as you are prepared for them. There are always deals to be had. You just have to adjust your thesis to the market. For more information on how to analyze bids, be sure to check out my new book Real estate in numbers here!

I will share my 2023 thesis with you all soon.

In the meantime, I’d love for you all to join me in this exercise in the comments. What did you get right about 2022? what did you do wrong We all share and learn together.

Note from BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.