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What Are the Signs of a Cooling Housing Market?
By Alison Tobin MONEY RESEARCH COLLECTIVE
Home buyers know what characterizes a hot housing market, including high prices and intense bidding wars. But what are the signals of a market that is beginning to cool?
In plain terms, a cooling housing market can mean prices are declining or price growth is slowing. In some cases, it can mean demand is going down or home sales are decreasing.
This type of market can vary by location. Some areas may cool faster than others, but it depends on how hot the market was to begin with and the area’s demand. For example, in Miami, housing is still in demand, but there are signs it is slowing down a little bit.
What exactly are the signs of a cooling market? Here’s what you need to know.
Inventory is up, and houses are taking longer to sell
One of the main reasons we experienced the high home prices over the last two years was because of such low housing inventory, but now, supply is better.
The U.S. experienced a record-high inventory growth rate in July, with active listings increasing by 30.7% over last year, according to Realtor.com data. Inventory is still lower than what we had pre-pandemic, but it’s increasing from the lows we experienced during the pandemic when housing prices were at an all-time high.
With more houses on the market, buyers have more options to pick from, leading to houses staying on the market for longer than they have been recently.
In July, houses in the U.S. were on the market for an average of 35 days; that’s up from 31.5 days in June. In general, homes are still selling quickly, but even the slight increase in the typical time on the market is a sign of a cooling real estate market. This time to sell is expected to continue to increase.
More buyers are backing out of deals
With competition waning, buyers are gaining back the ability to negotiate offers — and backing out of deals that don’t meet their criteria. This is a sign that things are calming down because, in recent years, buyers weren’t able to do any negotiating.
Since there are more houses to choose from, buyers are more likely to call things off if the seller isn’t willing to bargain with them to lower the price or make requested repairs before closing. House seekers know that there are other options available, so they think they can find something better if the sellers don’t work with them.
Another reason for this could be related to higher mortgage rates from the Federal Reserve. Borrowing money to get a new home is more expensive for Americans than it was a few months ago because of the Fed rate hikes. Some buyers may no longer be able to afford the potential mortgage payment with the higher rates, forcing them to rescind their offers.
There are more price cuts and fewer bidding wars
As rising mortgage interest rates cause some buyers to withdraw from the running, the pool of buyers is shrinking — encouraging sellers to slash listing prices to compete.
More than 15% of home sellers dropped their asking prices in July in each of the 97 major metros analyzed in a report from real estate brokerage Redfin. In Miami, for example, 18.5% of sellers cut their prices.
Sellers are still getting used to the shift away from such a hot housing market and are noticing that their house may not be able to sell for such a high price in such a short period of time as some houses did a few months ago. Bidding wars are also not as common.
Mortgage applications are decreasing
Another sign that there is less buying competition and the market is cooling is that mortgage applications are decreasing. Related to more price cuts, fewer mortgage applications signals that there are not as many people competing for the houses on the market.
As inflation is high and recessionary fears increase, homebuyers are wary. Mortgage applications decreased 23% during the week ending Aug. 26 from the same week last year, according to the latest Mortgage Bankers Association (MBA) weekly survey for last week.
While there are signs of cooling, this doesn’t mean it’s a buyer’s market just yet. If you are planning on buying a house, keep an eye on the affordability of interest rates from different mortgage lenders. Certain metros are still in a high-demand seller’s market, but if the U.S. falls into a recession, things could change.
Alison Tobin is a personal finance news writer and editor. She covers news topics in the areas of savings, investing, real estate, taxes, insurance, and more. Her work has been featured in Yahoo!, Forbes, AP News, PropertyCasualty360, and various local publications across the United States.