In February, Zillow made news by revising their national home price forecast, saying now that their model predicts year-over-year home price growth will peak at about 22% this spring and gradually decelerate to 17% by the end of 2022. According to Zillow, home prices (nationally) rose by about 20% year-over-year in 2021. This upward revision of their home price forecasts—the second in two months—is a little surprising and is at odds with most other housing market forecasts that are showing a bigger slowdown in home price appreciation this year.
Forecasting is hard in the best of times, but when economic conditions are uncertain like they are now, it is even more difficult. That said, I think the Zillow forecasts are overshooting what we should expect in 2022. Over the past couple of years, I have lost confidence in Zillow’s forecasting methodology after they said prices would fall during the pandemic and made errors in price forecasting that led to them shutter their iBuyer program.
We are forecasting continued price growth here in Virginia, though at a slower pace. In 2021, the median sales price in Virginia rose 9.4% year-over-year. In 2022, we are expecting prices to rise by less than half that amount, or 4.1% year-over-year, which is in line with price appreciation over the 2015 to 2020 period.
Home prices are fundamentally determined by supply and demand, so those are the factors we look to when forecasting price changes. Here is a summary of those supply and demand factors that suggest slower price growth in 2022 compared to 2021:
Supply. On the supply side, inventory will remain low in 2022 and low inventory would result in higher prices. In fact, the constrained inventory is the primary reason Zillow has upped its price growth forecasts for the first half of 2022. However, there are important demand factors that will be at play in 2022 and will offset the price pressures resulting from low inventory.
Demand. There are four big factors that suggest that the demand for homeownership will cool slightly in the coming year. Slower demand—or fewer homebuyers in the market—will lead to somewhat less competition and less upward pressure on prices. So, what are these demand factors?
- Mortgage rates will rise in 2022, which will cool demand. In general, higher rates will limit the amount a buyer can pay for a home. Higher rates will make it difficult for some homebuyers to qualify for a home loan and will therefore take them out of the market.
- Prices have been rising so quickly that affordability is a greater challenge, causing some would-be buyers to leave the market and either remain in their existing home, decide to rent, or continue to live with family or roommates.
- Inflation is also on a lot of families’ minds. Higher prices for gas, clothes, furniture, cars, and everything else families buy will cause some people to hold off on other big purchases, like a home.
- The mix of homes sold in 2022 will also be a factor in the overall year-over-year price growth numbers. More condos and townhomes will be sold in 2022 than during the pandemic. Condos and townhomes tend to be lower priced, so overall price growth across the whole market will look smaller.
There are positive demand factors in the market. The large Millennial population is in their first-time home-buying ages, and they are an important part of the market. However, the lack of supply, rising mortgage rates, and growing affordability challenges will hit this demographic particularly hard, and they could have a harder time competing in the 2022 market.
Putting all that together, we are forecasting the median home price in Virginia will rise by 4.1% in 2022, with faster price growth earlier in the year. Our year-over-year price forecast is a little higher than what NAR is forecasting nationally. The slower price growth does not mean the housing market is “in trouble” or is “weak.” Quite the contrary—the housing market is still very strong in 2022 with good demand (despite the headwinds above) and positive long-term economic and demographic fundamentals. Market conditions could start to feel less frenzied in 2022 (likely after a fast-paced spring), with slightly less competition, fewer multiple offers and bidding wars, fewer buyer concessions, and a slight rise in days on market. However, it will still very much be a seller’s market in 2022 and for the next several years.
For more information about Virginia’s housing market, check out our home sales reports and housing market forecasts. You can also take a look at one of our recent presentations or have one of Virginia REALTORS®‘ economists speak to your group.