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When will the housing market cool down?

Suburban homes on a street with fall foliage.
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When will the housing market cool down? The short answer is: The red-hot housing market isn’t expected to slow anytime soon. Government and business observers predict at least another year of low inventory, bidding wars and rising home prices.

Housing prices have continued to surge during the pandemic, with 2020 seeing the largest annual jump in prices one index has ever recorded.

The Federal Housing Finance Agency’s quarterly housing price index rose 3.5 percent in the first quarter of 2021 over 2020’s Q4, according to Lynn Fisher, deputy director of FHFA’s division of research and statistics. Even so, that represents slightly slower growth than in Q4, which saw a 3.8 percent average price increase, the largest quarterly gain in the history of the index. Year over year, however, saw a record-setting 12.6 percent increase in prices, highlighting how hot the market was in 2020.

Many factors are driving up competition

Since the start of the pandemic, real estate has remained a rare bright spot in an otherwise dark economic picture.

Lockdowns and remote work coupled with historically low mortgage rates prompted many people to move, especially out of cities and into suburbs in search of more space. Rebounding mortgage rates are adding a little extra squeeze to the already competitive market.

“Higher mortgage rates mean the red-hot housing market might downshift to merely sizzling,” says Greg McBride, CFA, Bankrate chief financial analyst. “The lack of homes available for sale is a much bigger impediment than a quarter percentage point rise from record lows in mortgage rates.”

What federal housing experts are predicting about real estate prices

The FHFA predicts the market will remain competitive for a while, as builders struggle to catch up to the demand for housing inventory.

“The rapid house price growth will not go away overnight, especially at the onset of the spring buying season,” Fisher said in a video released by FHFA. “Only time will tell how housing markets will adjust as the U.S. economy recovers from the effects of the COVID-19 pandemic.”

Until new construction catches up to demand, it’s likely that the real estate playing field will remain unusually competitive. Realtors in many markets expect it to take a year or more for things to return to pre-pandemic patterns.

As mortgage rates continue their predicted slow climb to the 3.5 percent range by year’s end, decreased purchasing power might ease some of the pressure as marginal buyers are pushed out of the market, but competition will still be intense among those who can still afford to buy.

The rise of iBuyers and private equity groups in snapping up homes for sale has also put pressure on the market and locked out more first-time homebuyers. This situation is likely to intensify in the coming months. Many of these homes are being turned into rentals, starving the market of even more inventory, Bloomberg reported.

Rising prices do benefit homeowners looking to sell, however. Higher real estate values mean more home equity for all homeowners. If you own your house and want to stay put, now is a great time to consider tapping that equity for some improvement projects or other investments.

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Written by
Zach Wichter
Mortgage reporter
Zach Wichter is a former 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.