But buyers shouldn’t celebrate just yet.
Talk about a turnaround: After two years of extreme bidding wars, packed open houses and sky-high prices, the housing market is finally starting to cool off.
While experts generally agree that the United States is not headed for a housing crash like the one that precipitated the Great Recession, some say there’s a risk of a correction — a type of pullback that’s typically more common and less intense than a crash.
Whether you’re predicting a cooldown or correction (or neither), there’s no doubt the housing market today is very different than it was in 2020. Nobody can predict the future, but for those determined to read the tea leaves, here are five signs the U.S. housing situation may be finally slowing down:
Inventory is growing
A serious inventory shortage was one of the biggest drivers of increased housing prices during the pandemic. Demand was booming thanks to the proliferation of remote work, but there just weren’t enough houses for all the people who wanted to buy (in the places they wanted to buy, at least).
The housing supply is still significantly smaller than it was before the pandemic, but the crunch is beginning to ease. There were 1.16 million unsold homes on the market at the end of May, according to the National Association of Realtors (NAR) — a 13% jump from the previous month.
And in June, there were 19% more active listings on the market compared to a year earlier, according to data from Realtor.com. That’s the biggest annual increase since Realtor.com began tracking that metric in 2017. The gains have been especially large in former pandemic hot spots like Austin, Texas, which saw a 145% surge in inventory on an annual basis last month.
Sales are slowing
As inflation pushes prices higher, the bear market takes a toll on portfolios and mortgage rates remain elevated, Americans aren’t buying as many houses as they did last year.
Sales of existing homes fell 3.4% between April and May. They were down 8.6% compared to May 2021, according to NAR. Meanwhile, sales of newly constructed homes dropped 6% on an annual basis, U.S. Census Bureau data shows.
“Home sales have essentially returned to the levels seen in 2019 — prior to the pandemic — after two years of gangbuster performance,” NAR Chief Economist Lawrence Yun said in a news release, adding that he expects sales to fall further in the months to come.
Mortgage applications are falling
As record-high inflation persists and recession fears mounts, the Federal Reserve has been rapidly raising its benchmark interest rate this year in an attempt to prevent the economy from overheating. When the Fed tightens the strings on the economy by making it more expensive for banks to borrow from one another, banks generally raise borrowing costs for consumers.
So mortgage rates have doubled — surging from 3% to nearly 6% — in past six months, forcing many hopeful homebuyers to step away from the market.
Rates have slid a bit since peaking in June, but buyers are still wary. Mortgage applications for the purchase of single-family homes during the week ending July 1 were down 17% compared to the same week in 2021, according to data from the Mortgage Bankers Association.
Buyers are backing out of deals
Some 60,000 home purchase agreements fell out of contract in June, according to data from real estate brokerage Redfin. That’s 15% of all homes that went under contract in that month — and the largest share of failures since the beginning of the pandemic.
“The slowdown in housing-market competition is giving homebuyers room to negotiate, which is one reason more of them are backing out of deals,” Taylor Marr, Redfin’s deputy chief economist, said in a news release.
He went on to suggest that rising rates are another reason more buyers are canceling sales. For example, “if rates were at 5% when you made an offer but reached 5.8% by the time the deal was set to close,” Marr said, “you may no longer be able to afford that home or you may no longer qualify for a loan.”
Sellers are slashing their prices
As more and more buyers are being forced to sit on the sidelines, a growing portion of sellers is cutting prices to stay competitive.
For each week in the four-week period ending July 3, Redfin data showed that an average of 7% of homes for sale had a price drop. That’s the largest share since Redfin began tracking that metric in 2017.
Redfin also found that some of the pandemic’s hottest cities have seen the most price cuts over the past year. In May, for instance, 48% of homes for sale in Provo, Utah, had price drops. The city saw its median home price skyrocket by more than 65% during the pandemic, according to Redfin.
What does a housing cooldown mean for buyers?
Unfortunately, these changes in the housing market aren’t enough to make a big difference for many buyers — at least for now. Home prices are still rising at the national level, and many experts expect them to keep rising through the end of the year as the shortage of homes persists.
“The ongoing inventory crunch means it’s still a seller’s market out there, at least for the moment,” Robert Heck, VP of mortgage at online mortgage marketplace Morty, tells Money.
Combine that with soaring mortgage rates, and it’s no wonder buyers are struggling to afford homes. The Federal Reserve Bank of Atlanta’s homeownership affordability monitor, which tracks the ability of a family earning the median household income to afford a median-priced home, is at its lowest level since 2008.
“The market is cooling off, but that cooling has happened on the backs of buyers getting discouraged, on buyers being forced out of the market,” Zillow senior economist Jeff Tucker recently told the Washington Post. “People who thought they would join the party are being greeted by absolute carnage as far as affordability right now.”
What does a housing cooldown mean for sellers?
Right now, sellers still have the upper hand. Redfin Chief Economist Daryl Fairweather said in a recent Q&A that it’s “less risky” to sell a home now than to wait until next year. She warned that while prices are still high now, they could drop next year if the economy enters a recession (as many experts are warning).
But be wary of unrealistic expectations, and don’t assume the days of multiples offers above asking price will continue.
“Sellers have been shooting for the moon, but the people who are serious about selling need to come back down to reality,” Lindsay Neuren, a broker with Compass in Austin, recently told Bloomberg.
More from Money:
The 10 Cities Where the Housing Market Is Cooling the Fastest
5 Cities Where Home Prices Are Most Likely to Drop Soon
4 Tips to Avoid Overpaying in Today’s Changing Housing Market
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