Fourth-quarter 2021 housing trends: Seasonal slowdown ahead

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The fourth quarter of 2021 will see the real estate market inching back to a more normal state. Experts predict the regular seasonal slowdown in transactions will take place, and after months of extraordinary competition among buyers, winter will give everyone a chance to catch their breath.

Many of the pandemic-instigated pressures on the industry will remain in place, however, so while things may calm down a little bit, the waters will still be choppy.

Here’s what you can expect.

Housing supply remains tight

Since the real estate boom started in earnest in the spring of 2020, lack of supply has been the dominating factor in the housing market.

“You’re dealing with the lowest housing inventory that we’ve seen in history,” said Noerena Limón, executive vice president of public policy and industry relations at the National Association of Hispanic Real Estate Professionals. “In terms of this quarter, we’re going to be living in the very, very tight housing inventory market that we’ve been living in for the past couple of years.”

Part of that is because new home construction takes time. While housing starts have picked up, that new inventory won’t necessarily be ready for sale this winter.

“The production of new homes is getting back to a more normal trend line,” said Robert Dietz, chief economist at the National Association of Home Builders. But, he added, that may not make a huge difference before the end of the year.

“In terms of construction, we’re seeing a leveling off of single-family starts,” he said. “We’re going to see a general trend that’s going to take hold here in the fourth quarter.”

Dietz added that supply chain issues should continue easing through the fourth quarter, though some materials like lumber and products like appliances will continue to be affected by shortages and delays.

The housing supply could get a boost from existing home sales as well, particularly as forbearance protections end for some homeowners affected by the pandemic. The first eligible borrowers who enrolled under the CARES Act will see those protections expire during Q4.

“We’re not expecting a foreclosure tidal wave like what we saw with the Great Recession,” said Frank Nothaft, chief economist at CoreLogic.

He said he does expect some subset of homeowners to go into foreclosure or be forced to sell their homes if they can no longer afford their mortgages, which will mean a slight uptick in existing home listings. Older homeowners may be more likely to list their properties in the spring, so existing home sales should pick up even further in early 2022, he adds.

Rising mortgage rates further squeeze affordability

Lack of supply has been the main contributor to high home prices in the pandemic economy, but low mortgage rates allowed homebuyers to borrow more, which added to the upward pressure.

Most experts predict mortgage rates will rise by the end of the year, and Nothaft said that’s going to make things more difficult for some would-be buyers.

“I’d be surprised if mortgage rates stayed at the rock-bottom level we’ve enjoyed over the past few months,” Nothaft said “That affects the affordability once again.”

Home prices should keep rising in most markets, albeit more gradually than they have for the past year or so. Coupled with rising mortgage rates, that could keep a significant number of interested homebuyers out of the market.

“We recorded the highest-ever growth rate of the national home price index in July,” Nothaft said. According to the S&P CoreLogic Case-Shiller National Home Price Index, the average price of homes in major metropolitan areas rose 19.7 percent in the 12 months that ended in July, a 1 percentage point increase from the year-over-year rate measured in June.

The landscape remains tough for first-time buyers even as competition eases

Although the fourth quarter should be less intense than earlier parts of this year have been, first-time homebuyers may still struggle to get to closing.

The market will remain strongly in favor of sellers through the end of the year, which means first-time buyers who would normally rely on assistance programs may struggle to compete with buyers who can make all-cash offers.

“One of the things that worries me is that communities of color, especially, are more likely to be first-time homebuyers,” Limón said. “FHA borrowers and VA borrowers being placed at a disadvantage is the thing I’m most concerned about, because it’s how many first-time buyers are able to achieve homeownership.”

Even as remote work enables many prospective homebuyers to expand their geographical search area, Nothaft said the fourth quarter is going to leave many first-timers still feeling squeezed.

“Yeah there’s still first-time homebuyers there, a little under 30 percent of buyers, but now the affordability picture has changed,” he said. “If you weren’t able to buy last year,” Nothaft added, “it’s a lot more challenging.”

Advice for homebuyers and sellers

As has been the case throughout the pandemic, the key question in the current real estate market is: what makes sense for you?

For homebuyers, if you can afford the mortgage payments you anticipate and can get an offer accepted, it can still be a great time to buy a house, despite all the competition.

For sellers, it’s almost certainly a great time to list your home. Although the winter typically sees fewer buyers and slightly lower prices, overall, home prices are way up from a year ago and you stand to do relatively well in the transaction.

Bottom line

The fourth quarter this year will feel a little more normal than the past 18 months, in that experts predict the regular seasonal slowdown to take place. That may give the market a little time to breathe after a particularly intense period, but many constraints, especially on affordability, will remain in place.

Even as it tails off slightly, demand for homes will remain high and the fourth quarter of this year should set things up for another busy market in 2022.

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Written by
Zach Wichter
Mortgage reporter
Zach Wichter is a mortgage reporter at Bankrate. He previously worked on the Business desk at The New York Times where he won a Loeb Award for breaking news, and covered aviation for The Points Guy.
Edited by
Senior mortgage editor