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22 | M R EP O RT FEATURE T here are several factors at play right now that will reshape the housing market in 2022. At the forefront of these developing trends are rising interest rates and continued home price appreciation: two factors that can deter buyers from the market. If it weren't for pent-up buyer demand, there might be a housing crisis afoot. Mortgage rates hit an all-time low during the pandemic, leading to a boom in first-time origina- tion and refinancing as buyers and homeowners looked to lock in savings. As we look towards 2022, there is one major factor at play that could shape the direc- tion of interest rates: rising infla- tion. In 2021, we saw a massive amount of inflation for the first time in years. Consumer prices jumped 2.6% in March, the biggest increase since August of 2018. Rising inflation rates in 2021 are thought to be driven by a combination of things, including a reopening economy, increased demand for goods and services, and supply shortages for goods and services. Thanks to elevated inflation, coupled with rapidly dropping unemployment rates, the Federal Reserve will begin to taper its asset purchases by the end of this year and is likely to raise short-term rates by the end of 2022. While inflation rates don't have a direct impact on mortgage rates, there can be indirect effects because of the way inflation influ- ences the economy. Mortgage rates are sensitive to economic trends, and if inflation is rising, mortgage rates tend to rise as well. It is likely that we will see mortgage rates rise, albeit slightly, with the 30-year, fixed-rate mortgage in- creasing to 3.8% by the end of 2022. However, the dynamic built during the post-pandemic homebuying frenzy means that there is enough pent-up demand to sustain home sales even in the face of increasing interest rates and sustained home price appreciation. No Sign of a Slowdown in Home Price Appreciation L ow rates cause demand to increase for new homes. This is generally a good thing for the market. However, increased demand combined with low supply has pushed up housing prices. As of the end of July, housing prices have continued their streak, up 19% year over year. High prices have certainly pushed some would-be buyers out of the market. At the same time, mortgage purchase applications (a leading indicator) were 12% lower than the same week one year ago, according to a recent Mortgage Bankers Association (MBA) weekly survey. There is little indication that this trajectory will reverse. Home price appreciation forecasts for 2022 call for continued increases. Goldman Sachs, for one, is predicting that U.S. home prices will soar another 16% through the end of 2022. Inventory Shortfalls Will Improve T he silver lining is that inven- tory levels are rising again— up 30% since they bottomed out at a 40-year low this spring. Then there is the possible inventory that could come to market as homeowners con- tinue to exit forbearance. There are currently about 1.6 million homeowners in some phase of the forbearance process. More than half (850,000) will be exiting forbearance between now and the end of October. Some of these homeowners may try to take advantage of the market and sell their homes for top dollar. We are already seeing defaults increase. According to ATTOM Solutions, default notices, sched- uled auctions, or bank reposses- sions spiked 34% in this year's third quarter. That momentum is likely to continue well into the new year, following nearly a year and a half of foreclosure moratoria. How much of a spike occurs will depend on how lenders choose to address distressed borrowers who are behind on their payments, but it is not going to be anywhere near the figures we saw during the great recession of 2009. U.S. households are sitting on record levels of equity in 2021. As such, even suggesting we might see a collapse in the vein of 2009 is far-fetched. According to CoreLogic's "Homeowner Equity Insights" report, U.S. homeowners with mortgages (roughly 63% of all properties) have seen their equity increase by a total of nearly $2.9 trillion from Q2 2020 to Q2 2021—a whopping 29.3% increase. The increase in inventory has translated into a substan- tial decrease in the number of homes seeing multiple bids. With increased supply returning to the market, it's likely that the home price bidding wars will continue to ease. This is by no means an indication of a bursting bubble; Déjà Vu All Over Again For the mortgage lending industry, 2022 will look an awful lot like 2021. By Shashank Shekhar