Price growth is likely to slow down next year, and a correction may await on a more distant horizon, but 2022 should nevertheless be a good year for home sales.

Inventory is down. Prices are up. The pandemic is lingering.

All in all, 2021 has been a year unlike any other — which is remarkable considering it came after also-unprecedented 2020. That craziness took center stage when Keller Williams kicked of its Mega Camp gathering, an annual event that this year took place virtually thanks to COVID-19. Among other things, Tuesday saw Keller Williams leaders touch on the outbreak, vaccines, and the market.

Following those discussions on the Mega Camp stage, Inman sat down for a phone conversation with Keller Williams Chief Economist Ruben Gonzales. The conversation touched on the state of the market, and what to expect in the coming months and years.

The takeaway from this conversation is that there are a number of reasons to believe the housing market of the next year won’t look quite like the past two. All in all, price growth is likely to slow down and a correction could be coming in the more distant future. However, those issues notwithstanding, Gonzales ultimately believes the economy is still strong and 2022 is unlikely to experience economic disaster.

Here’s what you need to know:

A housing correction

Gary Keller floated the idea of a correction during his presentation Tuesday morning, but didn’t say when it might arrive.

Gonzales also didn’t have a crystal ball to see the future, but noted that “I think we’re going to have to watch really carefully how things play out over the next three to five years.”

In the shorter term, Gonzales envisions home price growth slowing down, possibly into the “low single digits” as demand cools somewhat.

“We think that right now basically what we’re seeing is home price growth is unsustainable,” Gonzales said. “Our thinking right now is that we need to see prices slow down.”

Inflation

Inflation has been a looming threat for months now, and a report from earlier this year indicated that it could pose a threat to the housing market.

Gonzales confirmed that inflation has arrived, with prices for various goods in July jumping 4 percent — double regulators’ target of 2 percent. That’s obviously bad news for anyone with cash lying around, but Gonzales also doesn’t expect those gains to carry on indefinitely. And he added that what’s going on right now isn’t the same thing that happened in the 1970s, when prices for goods experienced a long period of sustain growth.

“The difference is that’s not a trend of constantly rising, accelerating prices,” Gonzales said. “All indications are that this is expected to be more or less short lived.”

Among other things, Gonzales said one of the factors driving up prices right now is shortages in various parts of the supply chain. A lack of microchips, for example, has sent the cost of everything from cellphones to new cars shooting up. And that trickles down to other goods; without enough new cars, used cars have also seen massive price increases.

Gonzales also said there are shortages for things such as shipping containers, which throws a wrench into the gears of the global supply chain. All of these problems trace their origins back to the pandemic, which didn’t have the economic impacts that many anticipated.

“The obvious thing was to assume that the economy was going to slow down,” Gonzales said. “And that messed up a lot of planning.”

The result was that there was a “cascading effect” resulting in higher prices. “It’s sort of one thing after another,” Gonzales added.

This isn’t a unique problem for the real estate industry, but the relative value of consumers’ cash and savings does impact what kinds of houses they buy and how much price growth they’re able to tolerate in the real estate market. And the severity of the inflation will shape regulators’ approach to interest rates, which then influence mortgage rates.

The good news is that the resulting inflation is tied to very specific supply chain problems and shouldn’t continue indefinitely. On the other hand, Gonzales thinks it could be some time before the supply chain has fully recovered.

“We’re going to have to work through this over the next year to three years in terms of getting our supply chain back working,” he said. “The global economy is a really big machine.”

Building new homes

Amid this year’s inventory shortages, many have looked to new construction as a potential solution. That’s especially true given that, as Inman has previously reported, the U.S. has experienced a decade of under-building relative to demand.

Gonzales agreed that there are too few houses and said the “logical conclusion right now is that we need more building.”

But there are a few obstacles to making that happen. One is that the supply shortages mentioned above have severely impacted building materials such as lumber and steel.

However, Gonzales also said many builders “still remember what happened in 2008,” meaning they may be reluctant to go all in at a time when there are numerous lingering questions about the health of the economy.

Remote work is also a big part of the equation. During Tuesday’s Mega Camp general session, Gary Keller noted that many industries that favor in-person work — so education, healthcare, construction, retail, etc. — have already significantly pared back the availability of remote work. If working from home continues to shrink, it could in turn impact the demand for the more suburban, further-flung housing that saw surging popularity during the pandemic.

If builders then sense that consumers are gravitating back toward more central locations, that could become an issue for erecting swaths of single family houses.

“There’s the question of where do you build,” Gonzales said. “The pandemic has allowed building to happen because people were willing to live further away.”

Housing affordability

During Keller’s presentation Tuesday at Mega Camp, he included a slide showing median home prices and median incomes in the U.S. diverging over the last several decades. The point was that homes have become less and less affordable as prices have outpaced earnings.

Speaking with Inman, Ruben said that divergence is real, but not equally felt across the entire market.

“As you look at the demographics of the typical homebuyer, they’re going to be in the top 20 to 40 percent of earners,” he explained. “There’s sort of a parallel story of how those who can afford houses are earning more.”

In other words, the divergence of incomes and home prices is being felt more acutely among people earning less. And Ruben said this affordability issue is compounded by things like student loans, which are a major issue for millennials of homebuying age, as well as the price jumps of the last year.

Gonzales said that the solution to growing affordability issues will likely have to come from lawmakers who set housing policy.

The market in 2021

Though there are plenty of issues to worry about, Gonzales was ultimately optimistic about the near future. Interest rates will likely rise, but moderately, and home prices should continue to go up as well, even if more slowly than in the immediate past.

And Gonzales added that he ultimately believes “home sales are going to be good next year.”

“We think overall we’re on good footing economically,” he continued, “and that should underpin a good housing market as we move into 2022.”