This time last year, there was a whole lot of end-of-2020 prognosticating about how the economy would play out in the first post-COVID year of 2021. Now, the country is heading into its year three of the pandemic with a new strain spreading faster than any that came before.
Needless to say, many of last year’s predictions never came true.
The end of 2021 will be the closing bookend on one of the most remarkable economic years on record, complete with record-low interest rates, record-high housing prices, historic job resignations and all-time stock market highs.
Inflation Remains the Economic Story of the Year
When prices rise across the entire economy, everyone feels it — and boy, did they feel in 2021. As the year draws to a close, inflation-based sticker shock is still the year’s most dramatic economic storyline.
“In the U.S., the Consumer Price Index climbed to 6.2% in October, representing a 31-year high,” said Maxim Manturov, head of investment research at Freedom Finance Europe, a subdivision of a Nasdaq-traded Freedom Holding Corp. “This has led to rising energy costs and soaring gas prices for individuals, while sprawling inflation rates have reportedly added an estimated $200 per month to the cost of living for a median-income household domestically.”
Manturov is one of many experts who predicts that the inflation dam will finally break around Q3 of 2022, when interest rates are expected to rise and supply-chain backlogs are expected to clear up.
“The growing cost of living won’t continue to rise forever,” Manturov said. “While it’s highly likely to linger long into 2022, rates are currently set to recover in the second half of the year as supply chains adapt to the demands of the pandemic and more countries around the world continue their vaccine rollouts.”
Construction Prices Will Keep on Rising
Inflation had already hit the construction industry long before prices started rising elsewhere in the post-vaccine springtime. It started with a lumber shortage that soon became a squeeze of construction supplies in general. Throughout the year, new construction projects and rehabs alike were delayed and coasts soared.
Then in November, President Biden signed a $1 trillion infrastructure bill into law, which some experts think will create so much new demand that construction services will cost even more next year — and the year after that and the year after that.
“This will contribute to rising prices not just in 2022, but through most of the 2020s,” said Nik Shah, CEO of Home.LLC.
Freddie and Fannie Will Back Bigger Loans
The ripple effects of the construction industry’s crunch hit the housing market first and worst, although other factors also teamed up to create the hottest seller’s housing market in a generation. Home prices rose by nearly 20% in 2021. That unsustainable level of growth is expected to fall to single digits next year, but the mortgage industry’s biggest government-sponsored enterprises (GSEs) will adjust accordingly.
“Fannie Mae and Freddie Mac will back loans up to $1 million from 2022,” said Shah. “Currently, Fannie Mae and Freddie Mac can buy single-family mortgages of up to $822,375 from lenders. By increasing this maximum limit to $1 million, the GSEs are sending a clear signal on increasing home prices.”
But You’ll Pay More To Borrow Money
Inflation in the construction industry was not the only thing that drove housing prices up to record highs in 2021. The lowest interest rates on record sent buyers flooding into the market and bringing an avalanche of demand along with them.
“Historically low mortgage rates have contributed to a strong housing market in 2021,” said Shah. “We expect that rates will slowly rise through 2022, and end the year between 3.8%-4%.”
That projection jives with the forecast of most Fed members, according to CNBC. Most members now expect at least three interest rate hikes in 2022. But just because you’ll pay more interest on auto, home, and personal loans, don’t expect to see a bump in your miserably low savings account APY. Lenders always charge more when interest rates rise, but banks don’t have to increase savings yields — and in 2022, they probably won’t.
Home Prices Will Rise, But by Less
Home prices can not continue to grow by 20% again in 2022, but that doesn’t mean the market is in a bubble or that the coming year will bring a crash, as many had predicted. At the end of 2021, it’s clear that housing prices will keep rising — a lot, by normal standards — but by much less than they did in the year that just passed.
“We are projecting a 5%-6% rise in home prices for 2022,” said Shah. “There simply aren’t enough homes available for sale in the housing market. Despite a modest increase in the last few months, housing inventory is very low, especially when compared to long-term historical trends. Pent-up millennial demand will continue to exert upward pressure on home prices well into 2023.”
Leftovers From 2021 Will Be the Last of the Stimulus Checks
Despite the alarming spread of the highly contagious Omicron variant, the third round of stimulus checks that came with President Biden’s American Rescue Plan will almost certainly be the last.
“It seems highly likely that another stimulus check of up to $1,400 can be expected in 2022,” said Joe Richard, founder and chief editor at Getpixie.
Parents who had a child in 2021 are eligible for the Recovery Rebate Credit. But beyond that, it would be wise not to expect a heavy lift like a fourth round of stimulus from a gridlocked Congress heading into an election year.
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