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The housing boom isn’t over yet, predicts a top analyst who sees a 12% increase this year

January 20, 2022, 10:00 AM UTC

If you’re confused by the conflicting news over where home prices are headed this year, join the crowd. The views from the top forecasters are all over the map. Most bullish is Goldman Sachs, foreseeing average appreciation of 12% through 2022. Zillow is also in the double-digit camp at 11%, but from there the estimates fall fast. Mortgage guarantors Fannie Mae and Freddie Mac posit 7.9% and 7.0% respectively, numbers that would register well above the 4.6% average performance witnessed since 1980. The next batch of the predictions drop well below the current pace of inflation, implying families could see their home’s value trail the rise in what they’re paying for cars, appliances, and groceries. Realtor.com’s number is 2.9%, Corelogic anticipates a gain of just 1.9%, and believe it or not, a prestigious industry player, the Mortgage Bankers Association, reckons that average prices will decline from $362,000 at the start of 2022 to $352,000 by year-end, for a drop of 3.2%.

One thing’s for sure: This year’s performance won’t match the 2021 gain of around 16% forecast by the American Enterprise Institute’s Housing Center—the last figure for November 2021 versus November 2020 was 15.8%. In my view, the best prognosticator in the business is Ed Pinto, the center’s codirector and former chief credit officer at Fannie Mae. Pinto not only taps the best data to predict where prices are headed a couple of months in advance, he also spends time in the field talking to buyers, sellers, developers, and planners to read the pulse of the market. I recently talked to Ed by phone as he toured rural Florida to see if the work-from-home economy would entice folks employed in Miami or Tampa to move 30 miles from the coasts in search of affordable housing. “People no longer have to commute to an office,” he said. “That shift could motivate them to move to inland areas in Florida where there’s been little growth and new housing for many years. That trend could rejuvenate those areas, and others across the country, and make make housing much more affordable for low- and middle-income people getting squeezed out of the market.”

Prices should rise around 12% in 2022, and much of that increase is already baked in

Pinto bases his predictions on “rate-lock data” from lenders that disclose the prices on homes that just went to contract and secured mortgage commitments. Those purchase prices mirror the official closing numbers that arrive about two months later. So each week, Pinto gets a clear view from the rate-lock trends what’s in store for what AEI calls “home price appreciation,” or HPA. That figure shows where prices stand in a given month compared with the same month of the previous year. He makes longer-term forecasts based on inventory levels, how fluctuations in interest rates influence demand, and societal shifts that influence buyers’ choices. Right now the big one is the ability to work remotely from just about anywhere, a phenomenon that’s luring families to relocate from the high-priced coasts to Boise, Phoenix, Raleigh, or Jacksonville while keeping an L.A. or Boston paycheck.

Pinto notes that year-over-year HPA began at 10% last January, then did a moonshot, peaking in July at 16.5%, before decelerating slightly to 15.8% in November. His rate-lock numbers show that gains will remain at 15% to 16% through February. He predicts that for all of 2022, the average HPA will be around 12%. “It could even be higher,” he told me. He foresees exiting the year with prices still increasing at an 8% to 9% clip. “All the negative talk about the market is wrong,” he says. “Gaining 8% or more is still gangbusters. It’s a continuation of what’s been happening for the last two-and-a-half years, and it’s not ending.” Pinto notes that the numbers he’s predicting would have been seen as extraordinary in most past periods. That the rate-lock data shows that HPA in the mid-double-digits is a certainty through February increases his confidence that the overall 12% forecast is right on.

“Eventually, these huge increases must revert to the mean,” observes Pinto. “But it won’t happen anytime soon. The momentum is just too strong.”

4 reasons why the housing boom has legs

The first is the most obvious: bargain home loans. “Mortgage rates are now at 3.47%, up from where they’ve been,” says Pinto. “But the rise is having very little effect on demand. It would take an increase to around 4% to slow the market, and the Fed would need to do a lot to get there.” Pinto predicts that even at 4%, HPA would exit the year running at 6% to 8%.

The second driver: incredibly low inventories. Today, the stock of homes for sale all find buyers in an average of 1.2 months. That compares with the over three months’ supply at the start of 2020 that even then signaled a tight market. “We don’t even see much seasonality,” he says. “Inventories have barely budged going into the winter, the slowest selling season. We’ll enter the active springtime with extremely low stocks.” He especially marvels that inventories sit at a sub–three months for high-end homes. In fact, the expensive categories nationwide are appreciating even faster than the low-priced tiers that normally outperform by far in a low-rate environment. “The Fed’s worked a miracle by goosing the entire market from the lowest tiers to the highest,” he says. “It’s even removed the seasonality that sees high-end home inventory rise sharply in the winter.”

Third, Pinto sees little addition to the housing supply looming. “The U.S. has 100 million homes, and on a net basis, around 900,000 new homes are being added each year after subtracting the demolitions,” he says. For Pinto, the extra 1% or so new houses entering the market won’t do much to swell supertight inventories. And the around two-thirds of new construction is coming where demand is hottest, in the Sunbelt swath covering North Carolina, Florida, Texas, and Arizona. Even in those thriving markets, restrictive zoning laws and labor shortages are keeping subdivisions sprouting at a rate that fails to match pandemic-driven America’s hunger for new homes.

Fourth, what might be called “the great arbitrage” is breaking the barriers that used to govern where folks live. That transformation is reinforcing the demographic forces that were already propelling prices to new heights before the crisis struck. “We’re seeing lots of household formation and millennials who are reaching homebuying age, and finally stepping up,” notes Pinto. “At the same time, older people are staying in their homes instead of going to assisted living or nursing homes—they’re staying put.” The work-from-home revolution is pumping the bellows. Families can sell a house in San Jose and buy one that’s much bigger and cheaper in Phoenix, bank a few hundred thousand, and still collect their Golden State salary. That newfound freedom is pushing up high-end prices in places like Charlotte, Tampa, and Boise.

As Pinto says, the doomsayers are wrong. Housing’s animal spirits are roaring at the start of 2022, and next New Year’s Eve will ring in another year that’s a little less intoxicating, but still a winner.

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