Where is the Housing Market Headed?

John Smith
January 1, 2023
5 min read

The housing market was on fire in 2021, with low rates and strong demand. But what’s in store for housing in 2022? Exploring this can help you navigate the opportunities while best advising your clients.

In this article, we will discuss the impact that inflation along with Fed actions may have on housing and mortgage rates this year. We will also look at Fed actions from recent history that can help us understand the effect those same decisions may have today, including critical wild cards that could also play a key role in this year’s outlook. Finally, we’ll highlight important MBS Highway tools that can help you thrive during these very volatile times.


Back in 2020 during the heart of the pandemic, the Fed began buying $40 billion in Mortgage-Backed Securities (MBS) and $80 billion in Treasuries each month to inject liquidity into the markets and keep long-term rates lower. These ongoing purchases were meant to stabilize the markets and aid in our recovery.

As inflation heated up, the Fed came under pressure last year to start tapering, or reducing, these purchases. In their meeting last November, the Fed initially announced that they would begin tapering their purchases of MBS and Treasuries by $15 billion a month.

However, in December the Fed decided to accelerate the reduction of their purchases of MBS and Treasuries from $15 billion per month to $30 billion.  The Fed stated that they would not shock the markets by tapering these purchases and hiking their benchmark Fed Funds Rate at the same time. Note that the Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates.

Said another way, the sooner the Fed reduces their purchases to zero, the sooner they can use the one tool they have to curb inflation, which is hiking the Fed Funds Rate. 

Why is this significant?

Last year, we began to see widespread inflation, in everything from gas prices to our weekly grocery run. In fact, 2021 marked the highest inflation readings in 40 years.

Inflation is the archenemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond's fixed rate of return. If inflation is rising, investors demand a higher interest rate to offset the faster pace of erosion of the buying power of their fixed payments they receive. This causes interest rates to rise.


While history may not always repeat itself, we can look back for clues regarding how certain actions may impact us today.

Arthur Burns was Fed chair in the 1970s and during his tenure, the Fed ignored inflation, which was rising rapidly. In fact, they incorrectly insisted inflation would be “transitory” or not permanent – much like current Fed Chair Jerome Powell erred last year. During Burns’ time, inflation went from 7% in 1978 to 14% by the time he left in 1980, while mortgage rates also rose from 12% to 18% due to inflation.

In the 1980s, Paul Volcker became Fed Chair, and he is known for ending high levels of inflation. To help fight inflation, he hiked the Fed Funds Rate from 11% to 20%. By taking these aggressive measures to fight inflation, Volcker was able to reduce inflation from 14% to under 5%.

How did the market respond to lower inflation? Mortgage rates moved from 18% to 12%. And while it was great to see mortgage rates and inflation drop, there were consequences, as the S&P sharply declined by 30%. This large drop in stock prices along with tighter monetary policy pushed the United States into a recession in 1982.

In the 1990s, Fed Chair Alan Greenspan saw inflation double from 1.75% to 3.5%. Mortgage rates also rose from 7% to 8.5% for a 30-year fixed rate mortgage.

Instead of waiting to fight inflation like Arthur Burns, Greenspan wanted to be proactive. In 1999, he hiked the Fed Funds Rate by 1.75% to match the rise in inflation, taking the Fed Funds Rate from 4.75% to 6.5% in just one year. In response, inflation dropped from 3.5% to 1%. The 30-year fixed rate mortgage dropped from 8.5% to 5.5%, creating opportunities to refinance.

Yet, as history has taught us, there are positives and negatives to this strategy. By hiking the Fed Funds Rate, the S&P 500 fell by 50% from spring to fall. With the stock market losing half its value in 2000, the United States entered another recession.

Looking back at these points in history, the actions taken to fight inflation led to a tantrum in the stock market. And both times in fighting inflation, we entered a recession.


Last year, Fed Chair Jerome Powell saw inflation increase from 1.75% to 7%, and he let it increase because he thought this rise in inflation was transitory. This higher inflation caused mortgage rates to rise from 2.5% to around 3.5%, though this increase was moderated by the Fed’s ongoing monthly purchases of MBS.

While the Fed is currently tapering these purchases, remember that the Fed has vowed not to hike their Fed Funds Rate and reduce these purchases at the same time. If they end their purchases of MBS and Treasuries by March, as they are currently on pace to do, they may begin hiking the Fed Funds Rate at or before their next FOMC meeting, which is in May.

The Fed is targeting three hikes to their Fed Funds Rate in 2022 and two or three more in 2023, though all of these will depend on how the economy and equity markets are performing.

It’s important to understand that inflation and mortgage rates can still rise until the Fed starts hiking its Fed Funds Rate. Along with inflation, mortgage rates will likely rise towards 3.75% during the first part of the year, then decline towards 3% in the second half as the Fed hikes its Fed Funds Rate.


As we have learned, COVID can change the world in a blink of an eye. During lockdown, consumer behavior changed. When people could no longer go out, they shifted spending their money on services to goods.  This caused major issues with our supply chains and labor.

To help with COVID, the government pumped major stimulus into the financial markets, which could happen again if needed. More stimulus means consumers have more money to spend on goods, and with the ongoing supply chain issues, this also means more inflation – and as we know, a rise in inflation could cause mortgage rates to rise. If this happens, it will make the Fed’s job of fighting inflation much harder.

Another wild card is if the Fed decides to run off its balance sheet. The Fed holds about $9 trillion in Mortgage Bonds and Treasuries, which means that they receive principal payments from those holdings which would normally reduce the amount of their balance sheet over time. Some of those securities would naturally mature as well. But the Fed has been taking these proceeds and reinvesting them back into Mortgage Bonds, which has prevented their balance sheet from getting smaller. These reinvestments amount to a massive additional $70 billion per month. But if the Fed stops these reinvestments, mortgage rates could move higher than previously thought.

Stocks, meanwhile, are very expensive. This is by almost every measure one of the most expensive stock markets in history. And as we have discussed, the stock market has not liked it when the Fed has hiked the Fed Funds Rate.

Our forecast is that we will likely see a near 10% decline in stocks this year. Maybe a little more. We’re predicting that drop in stock prices based off what has happened historically, and because now the Fed will be less accommodative due to the make-up of voting members this year.


We believe demand in housing will remain strong in 2022. However, it may not be as strong as in 2021 since low rates and COVID fears potentially brought future sales forward, and mortgage rates will likely not be as low in 2022. But when we consider yearly birth rates and the average age of first-time homebuyers, we see strong demand entering the market.

On the tight supply side, we should see slightly more inventory hit the market in 2022, but this will take time as there are still semiconductor and labor shortages. Semiconductor shortages hurt new construction because you need semiconductor chips in everything from refrigerators to dishwashers, and these shortages and lack of appliances delay the completion of new homes.

On the rental side, we see prices continuing to rise by more than 5% per year. This is where it’s your job to illustrate the benefits of buying over renting. You can use our Buy vs Rent Calculator to help articulate this to your clients.

Our forecast is for homes to appreciate by mid to high single digits.

If you want to present this 2022 forecast to any referral partners or clients, we turned it into a PowerPoint presentation our members can download, edit, share and present. This can be found in the Presentation Expressway library.

Our Buy vs Rent Calculator and 2022 Forecast are just two of the many tools that can help you thrive in this year’s market. Investing in an MBS Highway membership – where you'll have access to tools like our Bid Over Asking Price, Buy vs. Rent Comparison, Loan Comparison tool, daily coaching videos, lock alerts and more – means you'll have everything you need to turn prospective homebuyers into clients and become the type of advisor they need to guide them in today's market and for years to come.

Take a free 14-day trial of MBS Highway and see for yourself how we can help you grow your business and benefit from the opportunities 2022 will bring.

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