Frustrated homebuyers may have hoped for less competition, to please, during the torrid housing market of the past two years.
They got their wish. Homes on the market are not necessarily easy to buy. In fact, that part got worse.
We are starting to see more homes for sale. That should eventually tip things in buyers’ favor,” said Danielle Hale, chief economist at Realtor.com.
Local data shows that home sales are falling sharply and prices are starting to show as well. According to mortgage data and technology firm Black Knight, rate growth slowed by nearly two percentage points in June, the biggest one-month slowdown since the early 1970s. Data from the National Association of Realtors (NAR) showed home sales fell 5.9% in July, the sixth consecutive month of declines in June. They were down 20.2% from a year ago. The same report found the median sales price of an existing home in July was $403,800, down $10,000 from June. But compared to last July, it’s still a 10.8% year-over-year increase.
Compared to annual price growth of about 15%, “cooling” could mean 5% price growth, says Jacob Channell, senior economist at LendingTree.
“People who expect house prices to fall suddenly, or even lower, are probably in for a rude awakening,” says Channell.
Here’s what that slowdown means for home buyers.
How the housing market is slowing down.
To understand how the market went down, it’s important to first understand why it was so hot. A study by Freddie Mac, a government-backed lender that buys mortgages on the secondary market, points to four key issues.
- Lower mortgage rates in 2020 and 2021;
- Limited supply from construction;
- an increase in first-time home buyers due to an aging demographic; And
- Migration from high-cost cities to areas where there was already a housing shortage.
They have been replaced by the highest rates since 2008, but housing affordability issues remain, as those record mortgage rates are over as age and area demographics change.
Rising mortgage rates and the affordability problems they bring to a high-cost environment are key factors behind the slowdown, Hale says. “We’re seeing a reduction in sales,” she says. “This is generally because buyers struggle with high mortgage rates and high home prices. They are less able or unwilling to find a home in the right price range.
The big issue right now is that while demand may be softening, supply is not improving rapidly enough to make a big difference. “This particular housing market is unique because it’s not just because there’s so much demand, it’s because there’s less supply,” said Isabelle Barro, director of financial planning at Edelman Financial. Motors, National Financial Planning Organization.
This is especially true in very hot markets. In Atlanta, the inventory of available homes at the end of May was enough to last about 1.2 months, said Karen Hatcher, CEO of Sovereign Realty & Management and president of the Atlanta Association of REALTORS. A healthy stock lasts about four to six months.
“Demand is not enough to move the needle on price,” she says. “At 1.2 you’re still in a seller’s market.”
Current mortgage rates are making things worse.
If you’re trying to buy a home and don’t have the cash—for example, from selling your old home—you should get a loan. And that’s where the biggest cost shift for today’s homebuyers comes from. At the start of the year, the average interest rate on a 30-year fixed-rate mortgage was about 3.3 percent. It was close to 6% in June. That’s a big jump in a short amount of time, and it’s much harder for people to qualify for a loan and the higher payments they make.
“When prices were low, people were often able to buy more expensive homes because the lower rates reduced the increase in asking prices,” Channel says. “However, as rates go up, because a higher rate means your monthly payment will be more expensive, you’ll find yourself with much less wiggle room.”
There is not much comfort to be found in high house prices; You don’t have much choice there. With mortgage rates, even if you buy now, there is at least some comfort in the future. This is because you have the opportunity to refinance the loan in the future to get a better interest rate if these rates go down.
Experts also suggest that a 6% mortgage rate isn’t so bad if you look back more than a few years. In the 2000s, 7% rates looked pretty good, Barrow says. “Everyone is very sensitive right now about these interest rate hikes and watching them closely,” she said. “Historically, we are still at a low level in the interest rate environment.”
The home buying experience is changing.
High rates and mortgage rates are driving many buyers out of the market, which could create opportunities for those staying put. The chaotic rush of the past two years.
“They’re still facing a relatively competitive market,” says Hale. “The data suggests that well-priced homes are still selling quickly, in part because consumers in today’s market still expect mortgage rates to rise.”
Experts say a less competitive market doesn’t mean it’s not competitive at all, and it depends on your buying strategy and timeline. Hale said those with some flexibility can offer offers on multiple homes over time, potentially keeping one below list price. But those in a hurry to move are still experiencing headwinds.
It also means that some of the buyer behavior we’ve seen recently may be a bit off. Things like inspections or appraisals may not be necessary if buyers are competing with bidders. “This doesn’t mean things will suddenly become much easier for buyers,” says Chanel.
How to navigate the housing market
The recession means there are fewer buyers to compete with, but that’s because homes are less affordable, which can change how you approach your home buying process.
Be prepared with money to buy
Preparing to buy a home is more complicated than picking out the details and figuring out if you like the location of this one over the floor of that one. It starts with determining whether you’re in the right financial position to buy and how much you can afford.
Before you start thinking about how much home you can afford, he suggests, your first steps should be to make sure you have an emergency fund and give your own mortgage budget some cushion for things like unexpected repairs. Then focus on cleaning up your credit score, paying off credit cards or other debt to get the best possible interest rate. “Especially in an environment where the economy is not as steady as it was a year ago, it’s important to look at this affordability first,” she says.
Getting pre-approved for a mortgage is important, as is shopping for that loan. When you do, Hale suggests asking your lender what happens if mortgage rates go up. Then resist the temptation to cross what you intend to spend. “Figure out how much you want to spend on a home and stick to that budget,” she says.
Think a little
People like to think of their homes as their palaces, but resist the temptation to go for a full-fledged palace when you have a bungalow on a budget, especially if one is hard to afford. The home you find may not be perfect, but it may be something you can upgrade over time as your finances allow.
“It’s okay to buy houses and make improvements later,” Hatcher says. “He may not have everything you need, but he may have everything you need.”
Pro tip
Consider your financial situation before entering the housing market. Don’t sacrifice your other financial goals just to buy a house now.
Get help
You don’t have to go it alone on this home search, and you don’t have to go it alone for the down payment. You may live in a state or city where a down payment assistance program can make it easier to cover some of the down payment and pay for the home you want. Those eligibility requirements may be more consistent than you think, Hatcher says.
“If they qualify for down payment assistance, they should use the funds and get familiar with it,” she says. If you choose one of those programs, make sure you have a lender who knows them. An experienced lender will save you money and get you to the closing table faster.
What about adjustable-rate loans?
Buyers trying to find ways to buy a home today can be tempted by alternative loan products, such as adjustable-rate mortgages (ARM loans) that offer low initial interest rates for a number of years, which can then increase or decrease with variable rates. The market. Experts say buyers should be aware of the risks of those loans — unlike fixed-rate loans, your payments can change dramatically if rates continue to rise. “Don’t rush into the housing market right now, and a riskier type of loan will become more difficult over time,” says Channell.
Barrow advises buyers to focus on a 30-year fixed rate loan. “Once you get into that 30-year mortgage, you don’t have any inflation,” she says. “That means in five years or 10 years or 20 years it will feel a lot less valuable.”
There is always a renter.
Do the math to figure out what kind of home you can afford in this market, and if it doesn’t work out, don’t rush into a bad financial decision for fear of missing out, say experts.
“If the choice is more than renting something or buying a house you can barely afford, renting is a much better option,” says Chanal.
