There’s no denying that the real estate market is currently on a wild ride. More homes sold in 2020 than any year since 2006 despite a global pandemic. And while it looks like the market will continue to sizzle for the foreseeable future, it will not last forever.
Historically speaking, the housing market has been like a yo-yo, up one moment and down the next. The “ups” and “downs” may last for months or years, but it is inevitable that the current market will cool at some point. Although it’s impossible to predict when, there are at least five signs to look out for.
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1. Hike in the interest rate
The fact that the Federal Reserve set the prime rate near zero in order to combat the pandemic-fueled recession has been the primary driver of home sales. While the prime rate is not the rate we pay for a mortgage, it is one of the factors mortgage lenders use when they set rates for loans.
Basically, when the prime rate goes up, you can expect mortgage rates to follow. And with each upward tick of the interest rate, a buyer must do one of three things:
- Increase their down payment in order to keep the mortgage payment low
- Buy a less expensive property
- Pull out of the market until interest rates drop again
As interest rates rise, buyers can afford less, making the temptation to buy a home less of a factor.
2. Increase in inventory
Another factor driving record-high sales prices is lack of inventory. Between March, 2020 and March, 2021, housing inventory was down by more than 28%. With less inventory from which to choose, buyers hoping to take advantage of low interest rates competed with other buyers hoping to do the same thing. At some point, the log jam will break, more homes will come on the market, and buyers will not be so desperate to “win” a bidding war that they’re willing to forego contingencies (like home inspections). An increase in inventory does not mean that home sales will slow (particularly if the interest rate remains low). What it will lead to is less desperate buyers and more realistic sales prices.
3. Days on the market
As inventory rises, so do the number of days most houses linger on the market. The longer a house is on the market, the more likely the seller will be open to negotiations. Once homeowners are willing to negotiate and buyers feel safe writing contingencies back into their sales offers, it’s a good sign that the housing market is beginning to equalize.
4. Current demand met
At some point, the number of people willing to fight for a house in this tight market will dwindle. In short, serious buyers will have purchased a home or dropped out of the market long enough to allow things to cool. There are only so many people with the finances and desire to buy a house. Once their needs have been met, we’re likely to experience a market that feels somewhat “normal.”
5. Unforeseen circumstances
Another pandemic, a new war, political upheaval, a series of natural disasters, or a slower than forecasted economic recovery can all contribute to a slowdown in the housing market. Of course, good things could happen as well. The economic recovery could be more robust than forecasted, the price of materials could drop, and new builds could pick up at a rapid pace. The strength of the housing market is precariously balanced on circumstances we can’t predict but always react to.
Hot or cool market — it’s ultimately up to you
What’s going on in your life may not impact the housing market as a whole, but it should inform your decisions.
If you’re buying a home with someone else and the relationship is shaky, it’s worth pulling away from house hunting until you’re on solid ground. If you’re in a job you hate and want to start your own business, now may not be the right time to commit to a new mortgage. If you’re simply uncomfortable with marrying yourself to a huge loan that may prevent you from following other dreams, there’s no rule saying that you must buy a house.
Even if the housing market stays hot for the next two or three years, you may decide now is not a good time to buy a home. And that’s fine. Homeownership is not for everyone, despite any rumor to the contrary. If there’s any part of you that’s cool to the idea of signing a mortgage, pay attention. When it comes to making a commitment, your voice is the one that matters.
View more information: https://www.fool.com/the-ascent/mortgages/articles/5-things-that-could-lead-to-a-housing-market-cool-down/