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Signs of a cooling housing market and what that means for buyers and sellers

A housing development in Boulder, Colorado
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While home prices are still more than 20 percent higher today than a year ago, the question on buyers’ and sellers’ minds has turned to what’s next: Will the market slow down and, if so, will it happen anytime soon?

Understanding a housing market ‘slowdown’

A housing market slowdown generally means there’s a pullback in home price appreciation and more balanced inventory when the amount of homes for sale more closely aligns with demand. Other factors that usually precipitate a slowdown include fewer mortgage lenders willing to lend to borrowers, higher homebuying costs, and stricter credit guidelines.

“To me, a slowdown is typically when the number of houses sold starts declining,” says Mischa Fisher, chief economist at Angi. “Some people may refer to the rate of increase slowing down, but I think consumers get a more accurate sense of a cooldown by focusing solely on when the actual number of homes sold begins to drop.”

One of the largest slowdowns in the real estate market occurred in 2008 — “but the 2008 crash is not a comparable market, as we had an oversupply of homes and loose credit guidelines,” says Ralph DiBugnara, president of Home Qualified. We have not seen a comparable market over the last few decades. Before the recent housing boom that started around 2019, we were in a steady normal market for about ten years, as far as home appreciation goes.”

At the local level, too, many markets see fewer sales at certain times of year regardless of broader conditions, such as December and January due to holidays and inclement weather in some places, and July and August, when many are vacationing.

What’s happening to the market in 2022?

Now, following 14 consecutive months of annual home price increases in the double digits, there are indicators that the housing market could be slowing. Consider that 15 percent of home sellers lowered their asking price in April, up from 9 percent a year ago, according to Redfin. The real estate brokerage also noted a decline in requests for home tours and other homebuying services, which is representative of cooling buyer demand.

A more firm signal, though, is the sudden surge in mortgage rates, which has begun to price some buyers out.

“Higher mortgage rates are the single largest influence impacting a slowdown in housing because new buyers will face higher monthly and lifetime costs of owning a home,” says Fisher.

“Many buyers will leave the market or change their budgets, which will decrease demand for home purchases over the next two quarters,” says DiBugnara. “By the end of 2022, we should see prices level out. Homes that remain overpriced will either sit on the market or see huge price drops.”

There are differing opinions and prognostications regarding an impending cooling of the market, however.

“I believe we will see a shift to a more normalized market,” says Steve Adamo, president of National Retail Production with Embrace Home Loans. “Interest rates have increased and may increase slightly, which will impact affordability, but home price appreciation should continue, too, although not at the rapid level of the past few years.”

“We might see a market slowdown in the next year or two, but I don’t think it will be monumental,” says Tate Kelly, a real estate broker with Compass in New York City. “I anticipate a gradual flattening out due to interest rates rising and inventory increasing. I think demand will remain strong, but there will be less competition for inventory, and more buyers will be priced out due to higher interest rates.”

What a cooling market could mean for sellers and buyers

We’ve been in a seller’s market for several years in most areas. That could change quickly if a market slowdown is underway.

“A slower market will likely be better for buyers, as a lower volume of homes in demand should slow the upward price pressure on homes, making it a little more affordable for purchasers trying to enter the market,” says Fisher.

In a slowdown, sellers benefit less, but “they will likely still see some home value appreciation in a cooler market — maybe not double-digit increases, but more likely around 6 percent annualized appreciation, I expect,” says Adamo.

Keep in mind: In a market that favors buyers, sellers often must lower prices, agree to more contingencies and endure longer days on market. Buyers, in contrast, face less competition and fewer fears of a bidding war, giving them greater leverage in the deal.

“Sellers will have to come to terms that they may not get an astronomical price for their home,” says Laurie Eden, a real estate agent with Keller Williams in Austin, Texas. “Buyers who could not participate previously because rivals outbid them with more cash or fewer contingencies may have more opportunities if they still qualify with continued higher interest rates.”

Is a housing market slowdown a bad sign?

Is a slower-paced real estate market a red flag that signals a troubled economy? Are we in a housing bubble that’s due to burst? Is a recession on the horizon? As is typical in times of uncertainty, there’s no clear consensus yet.

“A slower housing market isn’t in itself an indication of a suffering economy,” says Adamo. “There are many factors that go into an overall suffering economy or that point to a potential recession. The good news is that employment has remained fairly strong, although inflation is at a 40-year high. The Federal Reserve continues to take actions to bring inflation more in line. We will need some time to see the results of their actions.”

“Consumer spending is still very high, causing supply chain issues and high prices, translating to high inflation numbers,” says DiBugnara. “The Fed is trying to slow these numbers by raising interest rates, which slows down the buying of anything that needs to be financed. This will increase supply and decrease demand. Consequently, we will see decreased spending everywhere, which may cause a recession.”

Ask Kelly, the broker in New York City, and he’ll tell you that a slower real estate market is not only overdue but would also be welcomed by many.

“The market has caused a lot of stress for both buyers and sellers,” says Kelly. “Everyone needs time to chill for a bit.”

Written by
Erik J. Martin
Contributing writer
Erik J. Martin is a Chicago area-based freelance writer/editor whose articles have been featured in AARP The Magazine, Reader's Digest, The Costco Connection, The Motley Fool and other publications. He often writes on topics related to real estate, business, technology, health care, insurance and entertainment.
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