3 real estate market forecasts for the rest of 2022 | Business news

The real estate market in the United States was determined unpredictable over the past couple of years. Many investors and industry analysts (myself included) thought that house prices would go down with the onset of the pandemic – and the exact opposite has happened.

Housing prices have soared: in 2021 alone, they rose by more than 20%. In 2022, mortgage rates rose more sharply than ever before. There are currently only a small number of homes for sale in the United States.

Having said all that, here are my three real estate market predictions for the last couple of months of 2022. Before we get into them, take all of these predictions with a grain of salt. There are many moving parts that affect things like home prices, mortgage rates, etc. investment appraisalstherefore it is impossible to say with certainty what will happen.

1. Mortgage rates will begin to decline – even with the Fed raising rates

Mortgage rates are not directly linked to the Federal Reserve’s base rate hikes, but they tend to move in the same direction over time. In 2022, the federal funds rate increased by 300 basis points (3%), and the 30-year mortgage rate rose from about 3.2% to 7.1%.

Mortgage rate for 30 years data on YCharts

However, keep in mind that this also happens while employment and consumer spending are high and the economy is not in recession. If we get into a recession and mortgage demand really starts to plummet, it’s possible that interest rates could reverse course even if the Fed continues to raise rates.

Now, I don’t think rates will drop dramatically to what they were at the beginning of the year, but if I were to make a prediction, I’d say we’ll end the year with a 30-year mortgage rate in the 6% to 6.5% range.

2. Housing prices will remain high

Rising mortgage rates have certainly made homes less affordable, but housing supply is also historically low. The inventory of existing homes for sale in the U.S. is about the same as it was this time last year (when prices jumped) and about 30% below comparable levels in 2019 (before the pandemic).

List of existing houses in the United States data on YCharts

Sure, home prices are down a bit from the all-time high of mid-2022, but they’re still about 40% higher than they were in early 2020. And while there are relatively few homes for sale, supply and demand dynamics are likely to prevent prices from falling significantly.

3. Real estate will be the weakest sector of the stock market

The real estate sector was very weak this year. Until October 28 S&P 500 decreased by about 19% in 2022, while Vanguard Real Estate ETF (NYSEMKT:VNQ) decreased by 29%.

It’s not that the core businesses aren’t doing well. For the most part, real estate investment funds, or REITs, are designed to remain profitable and predictable in any environment. But rising rates are generally a negative catalyst for income-oriented stocks like REITs.

I’ll spare you a long economics lesson, but the general idea is that when risk-free interest rates rise (such as those offered by Treasuries), returns on “riskier” investments like stocks tend to rise as well, causing growth share prices fall. With investors expecting the Fed to raise key rates by another 75 basis points in November and at least another 50 basis points in December, I wouldn’t be surprised if the real estate sector finishes the year weak.

I don’t have a crystal ball

To be clear, there’s no absolute guarantee that these things will happen, and it’s entirely possible that I’m wrong about one or more of them. But one thing can be said for sure: this is one of the the least predictable real estate markets of my life. All I can do is consider trends and the general economic climate. Invest accordingly.

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Matthew Frankel, CFP® has no position in any of the stocks mentioned. The Motley Fool has a position in and recommends the Vanguard Real Estate ETF. The Spotted Fool has a disclosure policy.