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Housing Supply and Demand in 2022: What to Expect

The Motley Fool
The Motley Fool
 2021-12-07

Housing supply and demand is one of the greatest drivers of real estate values in a given market. A balanced market means a healthy supply of both buyers and sellers achieving slow but steady home price growth over time. But when that balance gets out of whack, it can drive prices down or sky-high, like we're seeing today.

2021 was an extremely tough year for housing supply, as buyers far outpaced sellers in most markets. As we look toward the coming year, many are wondering where housing supply and demand will go in 2022. Here's what to expect.

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Image source: Getty Images.

Demand may slow some

Low interest rates have been a big driving force in creating new demand for homes in 2021. The Federal Reserve has stated it plans to increase rates marginally in 2022, but the move won't happen until mid-to-late 2022. An increase in interest rates and today's already record-high housing market means fewer people will be able to afford these home prices, and demand will likely cool a bit. But slowing demand doesn't necessarily mean things will be back to normal in 2022.

Supply constraints will likely continue

According to Realtor.com's latest housing trends report, active listings are down 21.9% year over year, meaning there were 179,000 fewer homes for sale in October 2021 compared to the year prior. And it seems supply issues will likely continue.

Supply chain issues will present new challenges for the housing market in 2022 and definitely won't help alleviate the current shortage of homes. According to the National Association of Home Builders (NAHB), October 2021 already saw a 0.7% decline in housing starts, or the equivalent of 152,000 homes authorized to be constructed but unable to be built due to supply chain issues.

Contractors and construction teams are also facing major labor shortages. More than 55% of homebuilders surveyed by NAHB reported a shortage of labor in 2021, while 90% of remodelers reported a shortage of subcontractors.

Input costs for homebuilders will also be put to the test in 2022 as the country faces record-high inflation rates, which push costs for materials and labor up. The U.S. Commerce Department has announced its plan to nearly double the tariff of Canadian lumber imported to the U.S. from 9% to 17.9%, which will have a major impact on lumber prices . Lumber prices have flattened back to pre-pandemic levels, but from late 2020 to 2021, prices went to record highs due to pandemic-related shortages and high demand. Continued higher lumber costs will likely result in more home start delays in 2022, further constricting supply.

All in, it seems housing supply and demand will remain pretty unbalanced until enough homes can be produced to meet the growing demand, which. according to various sources, will be millions of homes. According to compiled data from the NAHB, September 2021 saw 2.4 months' supply of homes, which means a pretty aggressive seller's market.

Seeing levels return to pre-pandemic supply is unlikely in 2022, given the challenges within the supply chain, but hopefully increasing prices will help the demand cool home values some.

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