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An increased supply and slowing of demand, likely due to rising interest rates, may causse the real estate market to be less competitive and see prices normalize.

2021 was an incredible year for real estate in the U.S. due to low mortgage rates, lots of demand, low inventory, and a rebounding job market. Supply and demand is still unbalanced headed into this spring, allowing sellers the upper hand. In an interview with the Associated Press, Lawrence Yun, Chief Economist at the National Association of Realtors® answers some burning questions about this year in real estate.

Question: How do you see the housing market’s trajectory shaping up this year?

Answer: The mortgage rates will definitely be higher, which means that people who were barely able to qualify last year will not be able to do so this year. Combine that with some increase in supply. Builders have the profit motive. Lumber prices and other materials costs are rising, but they’re simply tacking on those additional costs to consumers, who are willing to buy. So, increased supply, some chopping off of demand from rising interest rates, should lead to less intense competitive market conditions. Price growth will be something around 5% in 2022, which will be a very normal rate of increase.

Question: Fair to say homeowners who are selling will still have an edge on buyers nationally?

Answer: We’re in a housing shortage of roughly 3 or 4 million. And given that homebuilders can probably at the maximum put up maybe 2 million homes, more likely 1.7 or 1.8 million homes (a year), this housing shortage will persist this year and probably linger on somewhat next year. Hence, the market in 2022 will still favor sellers.

Question: How high do you see mortgage rates going this year?

Answer: My best guess at the moment is about 3.7%. It could be a little lower or a little higher, but it’s going to certainly be higher than the 3% people enjoyed last year.

Question: To what degree will higher rates dampen home sales?

Answer: Rising home prices have hindered affordability, but now rising interest rates are another thing that will begin to shave off some of the demand potential from first-time buyers. My official forecast for home sales this year is they will come down about 2% from last year.

Question: Has the pandemic led to any enduring changes to the way Americans buy and sell homes?

Answer: The pandemic will come to an end. Hopefully, the sooner the better. But the work-from-home situation, that development is here to stay. That will be the key factor driving the housing market preference and demand.

Question: What’s the biggest worry you have about the housing market now?

Answer: The housing market is on a solid foundation, in the sense that we don’t have those loose lending conditions. Housing equity, minus the mortgage balance, is substantial.

We need to ensure that the housing supply continues to increase, and look at converting office and other spaces to affordable housing.

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