What’s Going to Happen with Home Supply in 2022?

For anyone who bought or wanted to buy a home in 2021, it was a difficult time. In many parts of the country, it was very much a seller’s market.

There were a lot of factors that came together last year, driving up prices and making it tough even to find a home to put in an offer on.

The pandemic was one factor. Since the start of the pandemic in 2020, people have been relocating in large numbers due to concerns about staying in urban areas, the desire for a lower cost of living, a preference for more outdoor space, and because of new flexibility thanks to remote work.

The demand for houses in popular suburban areas soared over the past couple of years. There were bidding wars in many of the hottest markets, and buyers were consistently priced out.

There’s also another factor that impacted buyers negatively—a low supply of homes overall.

By the fall of 2021, there was a shortage of more than five million homes. Builders have been struggling to make up the difference, with the construction of single-family homes running at the slowest pace since 1995. Builders struggle to keep up with demand because of supply chain issues, increased supply prices, and labor shortages.

The following are some other things you should know about the home supply in 2022, its relevance, and what it might shape up to look like.

Household Formations

There’s a term, household formations, relevant to the housing supply. Essentially even before the pandemic, the formation of new households was seriously outpacing new construction. Over the last five years, construction simply has not kept pace with demand.

Since the Great Recession, single-family home construction has been rising, but it’s still not as high as it was before the housing boom.

Builders say grappling with supply chain issues is one of the biggest challenges holding them back.

Effects on Prices

Because of the shortage of available homes, the prices for new and existing properties rose at a record pace throughout 2021. Builders can’t produce cheaper homes because they’re more expensive than ever.

In a balanced market, there’s a healthy supply of both buyers and sellers. Home price growth should go up steadily, but it shouldn’t soar as it has been. When the balance of buyers and sellers is out of whack, the result is prices that are either driven down or extremely high, as we see now.

What Will This Year Look Like?

So, what might the rest of 2022 look like in real estate with all of that in mind?

Low interest rates have been one of the drivers in creating demand for homes. The Federal Reserve has indicated it will increase rates in 2022, and there have been some rises already. That means that fewer people will be able to afford homes in a market where the prices are already breaking records, so demand might cool a bit.

However, just because demand slows doesn’t mean we’re likely to see a complete return to normalcy this year.

Active listings continue to be down, according to recent trend reports.

The supply chain problems affecting builders do not seem abate either and aren’t likely to get resolved soon.

According to the National Association of Home Builders, in October 2021, there was a 0.7% decline in housing starts. That means there were 152,000 homes that had authorization for construction, but due to supply chain issues, they couldn’t be built.

The country is dealing with record-high inflation across the board, so that will continue affecting builders.

Most analysts think the imbalance between the supply and demand of homes will stick around throughout the year.

There will need to be millions of homes produced to meet the demand.

As far as existing homes, owners are likely to hold onto those, too, rather than putting them on the market.

More older people stay in their homes and follow the trend of “aging in place,” meaning they might modify their property to meet their changing needs rather than leave it. Homeowners are also nervous about the prospect of finding a new place to live if they do sell, plus there’s a lot of general uncertainty about the future right now, making people more likely to stay put.

Homeowners might not want to deal with rising interest rates if they were to sell their current home and look for a new one either.

While there might be a bit of cooling in home prices, we’re unlikely to see any substantial shifts in supply in 2022.