It was quite the ride for the U.S. housing market in 2021. According to the Federal Housing Finance Agency, home prices rose almost 20% on average through the third quarter of the year compared to 2020. This jump was the largest annual increase since the agency's House Price Index began keeping track. Some of the hottest markets saw a price increase that was double that figure, pointing to the localized nature of the U.S. housing industry.

Approximately six million homes were sold over the last year, a number not seen in 15 years. Sellers were in the driver's seat all year with some families enjoying multiple competing bids the day the house went on the market.

It was a different story for buyers. Although buyers were buoyed by record low mortgage rates, the low inventory of houses made it nearly impossible for some buyers to find their way into a home. Demand for rentals skyrocketed as a result of the low housing inventory, causing rental costs to rise sharply as a result.

After experiencing one of the hottest markets in history, what is in store for the U.S. housing industry heading into 2022?

Historically Low Mortgage Rates Predicted to End

The beginning of 2021 was defined by its record low mortgage rates. Average rates on a 30-year fixed rate mortgage hovered around 2.65% to start the year. Buyers that were ready to pull the trigger early in the year were the beneficiary of these rates. However, the rates quickly accelerated, reaching an annual high of 3.18% by the beginning of April. Rates continued to fluctuate throughout the year, closing the year at just above 3%.

The U.S. Federal Reserve has signaled that the favorable rates brought about by the pandemic are going to come to an end. The Fed is now focused on curbing extraordinary inflation costs. As a result, interest rates will continue to inch higher in the months to come. While mortgage rates will likely hover around 3% for the first quarter of the year, the current forecasts predict that this rate will increase up to a half of percentage point in the months to come.

Prices Continue to Rise

Just as mortgage rates are expected to rise, home prices are also forecast to see this trajectory. Although the increase will not be as dramatic as 2021, overall prices are still expected to increase at a moderate pace. Most forecasts predict that the median home price will soar between 5% and 6% in 2022. The slowdown is being attributed to the expected interest rate hikes by the Fed as it tries to hold back rising inflation worries.

Low Inventory

Although housing inventory is predicted to improve slightly in 2022, it still will not be enough to make a significant difference in the overall picture. According to a recent Realtor.com forecast, housing inventory is only predicted to grow by about 0.3% in the coming year. As a result of this low inventory, buyers can expect stiff competition as they make offers. This will also continue to contribute to the rising home costs as sellers can get aggressive in their pricing.

Struggles for First-Time Home Buyers

The challenging plight of the first-time home buyer will spill over into 2022. Rising interest rates, increasing prices, and low inventory will all combine to make it even more difficult for first-time home buyers to jump into the market. Many prospective home buyers found that they were passed over for more privileged buyers offering all-cash deals or boasting more attractive conventional loans. This trend is expected to continue over the coming months, particularly in the new construction homes that are now mostly pricing out first-time buyers.

As the past few years have taught us, it is impossible to predict what will happen in the housing market in the next month, let alone the next year. The uncertainty of the pandemic and its effects on the economy will continue to be the overriding factor in how the housing market plays out in 2022. As always, it is best to focus your research on your specific local market rather than national trends as a whole.