Is the Housing Market Going to Cool Down Soon? Experts predict that the housing market will cool off soon.

The pandemic’s peculiar outcrop is today’s hot housing market. The housing supply was already very low before Covid-19. But it became even more difficult when lockdowns were implemented and people started looking for homes. These reasons ranged from the desire to move to less populated areas to better home offices to fear of missing out (FOMO).

The Federal Reserve has continued to take steps to maintain liquidity in the financial markets and ensure that mortgage rates remain low. However, the low mortgage rates are insignificant compared to the soaring housing price in the last year.

According to the CoreLogic report, home prices in America grew 17.2% in June 2021, including distressed sales. This is a record-setting high. While there have been hot sellers’ markets in the past it is hard to compare with the current market, where more than half of the homes on sale are above the asking price.

Frank Nothaft, CoreLogic’s chief economist, stated, “We have been following housing prices for more than 20 years and we’ve never seen anything similar.”

Fall has historically brought less competition and better deals, as more children return to school and holidays take over schedules. The pandemic changed that trend and many cities are experiencing double-digit percentage increases in housing prices.

Forbes Advisor spoke with housing experts to find out what buyers and sellers can expect in the middle of summer.

Are Housing Prices Falling?

Although it might seem too early to celebrate, potential homebuyers can rest easy based on the predictions of real estate professionals. As more single-family homes become available, prices are starting to fall in certain areas.

According to the National Association of Realtors (NAR), unsold homes increased 3.3% to 1.25million between May and June. The increase in inventory may not be enough to satisfy demand but it could give buyers hope and potentially buy leverage, with more options.

Tamar Asken, realty agent at Avenue 8 Los Angeles, says that mortgage applications have fallen to an 18-month low and there is real buyer fatigue. “Sellers are reacting to lower buyer enthusiasm by reducing their prices.”

Northern Virginia home prices increased 10.9% in June 2021 year-over-year (YOY), compared to last year. Fairfax City and other affordable parts of Northern Virginia saw a greater rise in YOY median house price increases (15.1%), compared to Falls Church which only experienced a 3.2% increase.

Ryan McLaughlin (CEO, Northern Virginia Association of Realtors) stated that the market in Northern Virginia has slowed down significantly over the past month. There have been fewer offers and more days on the market. This would be normal in a typical year but it is quite surprising given the intense spring market. This could be because of an increase in travel after pandemic restrictions were lifted.

Cape Cod is part of the “Zoom Towns” housing boom that took place last year. It is beginning to see some relief from the increased demand.

According to Ken Hager, general manager at Gibson Sotheby’s International Realty on Cape Cod, the initial pandemic buying spree reduced Cape Cod inventory to approximately 2,300 homes. This was in addition to the 230 homes that were sold. Hager believes that the market is starting to normalize.

“Looking ahead, prices could rise on Cape Cod, as well as elsewhere in the country, but at much slower rates,” Hager states that prices will likely fall from panic-buying peak levels.

For some communities, however, the pandemic provided a much-needed boost to the slow price appreciation that was leftover from the previous housing crisis. Wisconsin was one of the slower states to recover from 2008’s crash. In 2008, foreclosure filings reached a record high of 21.5%.

“In many of our communities, it took until 2018 for the values to be restored to pre-crisis levels. We have seen double-digit appreciation since then, but it has largely just been a return to the mean,” Rick Ruvin, a partner in the Falk Ruvin Galagher team at Keller Williams, Milwaukee. “Locally we anticipate an evening of the playing fields and a return-to-offers with the usual inspection and financing contingencies.”

Buyers are becoming more risk-averse

Consumers also flocked into the real estate market last year in a similar fashion to how the pandemic caused a toilet paper and sanitizer buying frenzy. To beat the competition, buyers are willing to go all out in pursuit of houses.

All sorts of bizarre and possibly reckless behavior resulted, with buyers forgoing contingencies from the sales contract meant to protect them and their earnest cash, which can be thousands of dollars. Some buyers used their retirement savings while others took out loans to appear as all-cash buyers.

However, this “going-for-broke” approach may be in decline, according to Brady Miller, CEO of Trelora (a Denver-based real estate company). Some buyers are realizing that they may be putting too much on their line, Miller states.

Asken, a Los Angeles-based realtor, said that she’s starting to notice that buyers are taking more caution.

Asken states, “I don’t see the same level of desperation or urgency that I saw a few months ago.” Many properties don’t feel like a great deal after large price increases.

Rates Forecast and Housing Market Predictions

Although history suggests that fall is the best time to buy real estate, last fall was a surprise with record-breaking home sales growth. Are we likely to see the same thing later in the year?

Ralph B. McLaughlin, Haus, Inc.’s chief economist and senior vice-president of analytics, predicts that demand will return to the usual cooling-off period of the fall, citing the recent expansion in inventory and falling home prices.

McLaughlin states that “it’s very likely that price growth will slow throughout this year,” as they are already slowing since June’s peak. “We anticipate price growth to moderate to mid-high single figures by December.”

McLaughlin said that inventory will not recover fully until next spring.

Nothaft, too, was cautiously optimistic. He pointed out that inventory is rising partly due to lower lumber prices and new sawmills being built in the U.S. However, Nothaft acknowledges that the housing supply is still far from meeting demand.

Nothaft expects the mortgage rate to rise as we move into fall and the new year. Since last summer, the average mortgage rate for both fixed 30-year and adjustable 15-year mortgages has been at an all-time low of 3% to 2%. This has only encouraged a fervent housing market. Higher rates should help to subdue the demand.

Nothaft states that although mortgage rates are at an all-time low and rock bottom, they won’t stay this way forever. “Throughout 2022, we will see a gradual increase, probably half a point higher than 2021. This will moderate the demand.

How potential buyers can prepare

Buyers who are waiting to be offered a deal should take immediate action to get their finances in order.

It is a great time to improve your credit score. A higher score will result in lower rates which translates into lower monthly payments. All three credit bureaus will provide weekly credit reports until April 20, 2022. You’ll be entitled to one free credit reporting from each bureau every year after that.

Remember that home prices increase, so your down payment requirements will also rise. As home prices continue to rise, the 5% down payment required for a house is now much higher. Keep saving and look into down-payment assistance options. Also, read our Information Technology blog!

Mark Xander

Mark Xander

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