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With mortgage rates recently crossing the 6 percent threshold, home sales cooling significantly and fears of a recession looming across the national landscape, the housing market appears to be firmly in “correction” territory.
That’s a quick assessment of the real estate climate entering the fourth quarter of the year, a time during which the experts anticipate a further slowdown of sales, rates drifting even higher and increased uncertainty from both buyers and sellers regarding what to do next. Yearning to learn how the housing market will shake out over the next three months? Here’s what industry insiders have to say.
Q4s traditionally slow for real estate
Traditionally, housing market activity tends to decelerate in the fourth quarter, a period that usually proves to be the slowest three-month stretch of the year.
“Seasonality plays an important role in the housing market, since it has an impact on housing demand and supply,” says Nadia Evangelou, senior economist and director of forecasting for the National Association of Realtors (NAR). “Every year, transactions and prices tend to be above-trend in the summer, while activity typically slows down by the time winter comes. Activity in the last quarter typically drops by 15 percentage points from the third quarter. Nevertheless, I believe the market will remain competitive due to tight inventory.”
Expect no deviation from that pattern this year, says Dennis Shirshikov, head of content at the real estate investment site Awning. “The fourth quarter of 2022 looks like it’s going to be very similar to the traditional slowdown in most markets,” he says. “The only exception appears to be traditionally strong vacation rental markets, which have seen significant appreciation and resilience because of very low inventory levels.”
Selma Hepp, the interim lead of CoreLogic’s office of the chief economist, also doesn’t expect to see heavy activity in Q4 2022. “Current mortgage rate increases will likely put another damper on home sales activity, resulting in a greater decline in sales than historically seen at the end of the year,” she says. “Also, with price reductions already on the rise and a decline in higher-priced home sales, home prices are likely to take a bigger dip than expected.”
While this might spell bad news for sellers, it’s welcome news for buyers. Unfortunately, though, there are still those high mortgage rates to contend with. If prospective purchasers sit on the sidelines as a result, the silver lining will be an increase in housing inventory, which in turn could put further pressure on sellers to lower their prices — all of which signify a long-overdue course correction for the housing market.
Home prices and inventory levels shifting
Many facets of the market are trending downward right now. Existing-home sales decreased for the seventh straight month in August, according to NAR data. In addition, the latest Case-Shiller Home Price Index shows price growth decelerating at a record-setting pace. And while housing starts increased 12.2 percent in August, permits for future residential construction fell to the lowest level observed since June 2020.
Kenon Chen, executive vice president of corporate strategy for Clear Capital, believes we may see a more dramatic pullback of home listings and sales in the last quarter of this year. “With mortgage rates currently above 6 percent and many existing homeowners with a [locked-in rate] of 3 percent or below, I expect that fewer people will be willing to move or put their homes on the market,” he says.
“I expect home prices will dip roughly 10 percent in most markets in the fourth quarter,” says Shirshikov. “This is mostly due to concessions and homes being relisted at lower prices. Meanwhile, housing inventory will rise, and houses will stay on the market longer.”
Where Q4 mortgage rates are headed
Unlike home prices, though, rates are not showing signs of falling anytime soon. “Until we see a broad-based, sustained moderation in price pressures, the risk is that mortgage rates continue to climb,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “But, at a point where inflation starts to slow in a material way and the economy is weakening, mortgage rates could have a sudden downdraft. Not sure if that happens by the end of the year or not, but it’s coming at some point.”
Shirshikov agrees that rates will continue to trend upward through the end of the year. “The trend will only be accelerated by inflation and lower-than-expected consumer and business spending figures,” he says. His forecast sees 30-year rates potentially skyrocketing to 8.5 percent this quarter.
Hepp, on the other hand, is hopeful that rates will dip back below 6 percent before the end of the year. She predicts the 30-year mortgage loan averaging 5.85 percent in Q4.
Strategies for homebuyers and sellers
With mortgage rates spiking out of the affordable range and home prices dropping — although not fast enough for many — plenty of buyers and sellers are unsure what their next move should be.
McBride’s advice to sellers is simple: “Price your home realistically. This isn’t the housing market of April or May, so buyer traffic will be substantially slower, but appropriately priced homes are still selling quickly,” he says.
“If you’re holding out to get top dollar today, you may end up stuck with your home for the foreseeable future,” notes Shirshikov. “Sellers should strongly consider making minor concessions rather than risk sitting with the property for a long time.”
Potential buyers, meanwhile, face a difficult choice: Postpone a purchase until prices plummet, or lock in a mortgage now before rates soar even higher?
The prevailing sentiment from the pros is to hit pause until financing becomes more affordable, especially if you aren’t in a rush. But if you are in a strong financial position, you may want to commit to a purchase while prices are (relatively) low. You can always refinance your mortgage down the road when rates are more affordable.