After more than a year of soaring demand, exploding home prices and rising home sales, the market finally appears to be cooling off.
“The housing market is not collapsing, but it is experiencing a hangover as it comes down from an unsustainable high,” said Taylor Marr, deputy chief economist at Redfin.
In a Fannie Mae survey of buyer sentiment, a record 79% of respondents said it’s a bad time to buy a home.
“While many home sellers are already lowering their prices, more homeowners are likely to decide to sit still now that the mortgage rate on a new home is significantly higher than it is now,” Marr said.
While the market is still very strong by historical standards, here are five reasons to believe the tide is turning.
1. The stock of homes for sale is growing
With demand for homes outstripping supply, the stock of homes for sale had been consistently falling year-over-year during the pandemic housing boom, said Danielle Hale, chief economist at Realtor.com. “We were talking about low inventory in 2019 and it just kept getting worse.”
But in May the stock started moving in a different direction, according to Realtor.com data, and in the most recent week active listings were up 13% from last year.
“Seeing the number of homes increase is great news for homebuyers,” Hale said. “That changes the trend and they’re seeing more homes. That should help balance the market, slowing home price growth and increasing time on market.”
In addition to the high costs that push potential buyers out of the market, part of the reason there are more ads is that more homeowners are deciding to sell, Hale said. More new listings entered the market in May than any other month since June 2019, according to Realtor.com.
“But home prices are showing a lot of gripping power,” Hale said. “Price growth will slow, but I expect prices to remain high. If home sellers don’t get the price they want, they probably won’t put it on the market.”
2. More price cuts
If you’re looking at homes, you might be noticing something you haven’t seen in a long time: lower prices.
For a while, homes sold so quickly, and often with bidding wars, that sellers often got more than they asked for. But as affordability challenges squeeze buyers and there is less competition to buy, some sellers are deciding to lower the price.
Price cuts were seen in 10.5% of homes in May, up from 6.2% in May 2021, according to Realtor.com.
But that does not mean that there is a sale of houses.
“The share of homes with price reductions is higher now, but the share in May is still lower than in May since 2017,” Hale said. “It’s less competitive than last year, but it’s still pretty competitive.”
3. Real estate companies are laying off people
This week, Redfin said it cut about 8% of its employees and Compass said it would reduce its workforce by 10%.
Demand for Redfin’s services in May was 17% below expectations, said Redfin CEO Glenn Kelman. As a result, the company is not generating enough work for agents and support staff.
“Today’s layoff is a result of deficits in Redfin’s revenues, not the people being laid off,” he said.
At Compass, 450 of its 4,500 employees will be laid off, “due to clear signs of slowing economic growth,” according to a company statement.
4. Mortgage applications are inactive
As mortgage rates have risen, prospective homebuyers are applying for fewer loans.
In the week ending June 10, mortgage purchase orders were down 16% from a year earlier, according to the Mortgage Bankers Association.
“Purchase orders are down compared to last year as ongoing inventory shortages and affordability challenges have cooled demand, coinciding with the rapid jump in mortgage rates,” said Joel Kan, associate vice president of economic forecasting. and industrial of the MBA.
With mortgage rates well above 5%, refinancing activity that was at an all-time high when rates were at their lowest point during the pandemic has dried up to more than 70% below last year.
5. Fewer people are buying houses
With prices so high and mortgage rates still rising, fewer people seem to be buying homes now.
A Redfin index measuring homebuyer demand – measuring orders for home visits and other home-buying services from Redfin agents – fell 14% year-over-year during the week ended June 12. This was the ninth consecutive week of declines in the index.
“If it weren’t for rising mortgage rates, the housing market would still be booming right now,” said James Cappello, a Redfin agent in the Bay Area. “Demand from homebuyers was still extremely high in February, but rates are making it very difficult. Going from 3% to almost 6% almost instantly scared a lot of people in the market.”