Inflation and steadily rising mortgage rates may finally be cooling down the red-hot housing market. Even though there’s still competition for a reduced number of homes for sale, economists are seeing signs of a market slowdown.
Sales of existing homes dropped by more than 7% in February, a decline that the National Association of Realtors (NAR) chalked up to not enough homes for sale. But economists interviewed this week by Fortune say other factors may have been at work, and they will likely be more influential in the months ahead.
"We saw a clear shift in the housing market as rates rose to 5% at the end of March," Devyn Bachman, vice president of research at John Burns Real Estate Consulting, told the magazine. "We are hearing about qualification issues, rising cancellations, and increased buyer hesitancy, particularly at entry-level price points and in remote locations."
Patience may pay off
To be clear, the Federal Reserve will shed no tears over a slowing housing market. It’s currently struggling to dampen inflation, and home prices have been doing nothing but going up over the last couple of years.
For would-be buyers, it may also turn out to be an opportunity if the market softens. Howard Dvorkin, a CPA and chairman of Florida-based Debt.com, says this is no time for buyers to take on a debt that may prove to be unmanageable.
“If you find yourself saying out loud, ‘I think I can stretch my budget to buy this home,’ don’t do it,” Dvorkin told ConsumerAffairs. “Your budget will be stretched after you buy a home. Don’t forget all the background expenses that go into a just-bought home – from taxes to furnishings, from repairs to maintenance.”
Dvorkin also says there is no reason to rely on guesswork. He suggests using available online calculators to determine affordability.
If economists are correct and the housing market slows, buyers shouldn’t expect prices to go down, at least not by much. But there should be fewer bidding wars, which have frustrated buyers and served to drive up prices over the listing price.
Fewer concessions may be necessary
Other changes from the last two years may include fewer concessions from buyers. In 2020 and 2021, buyers who agreed to waive contingencies became the norm. Dvorkin says giving up a right to an inspection was always a bad idea, just like buying a used car without test driving it.
“Would you trust the seller who says, ‘Don’t worry, I only drive it to church on Sundays, give me your money?’” he asked. “Homes are more expensive than cars, so never waive an inspection. Shortcuts might get you into a home or car quicker, but then you’re stuck paying for anything that goes wrong. And trust me, cars and homes always break.”
Mortgage rates that are north of 5% will make it more expensive to buy a home, but market analysts say that will force sellers to be more realistic. They say April started with a slight increase in the number of available homes for sale, and real estate broker Redfin reported an increase in the number of sellers who have already lowered prices.