One of the most thrilling moments riding a roller coaster is the moment of anticipation after climbing to the top of a hill.
It appears the housing market has reached that point, but thrillseekers will have to get their fix elsewhere. The white-hot market is poised for a long, gradual slowdown – making it the most boring roller coaster imaginable.
Early spring housing data suggest that fast-rising prices and mortgage rates are cooling demand and changing the trajectory of a record-setting housing market.
Here are 5 signs that the housing market has reached a tipping point.
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Scarce inventory is a key driver of price growth in the housing market and has been at record-lows for much of 2022.
Altos Research data from early May suggests inventory is climbing faster than it was at this point last year, and may be headed for year-over-year growth for the first time since 2019.
“Inventory climbed another 4.5% this week. That’s a big change. Inventory is climbing much faster than last year at this time,” wrote Altos CEO Mike Simonsen in a report. “In fact, at this pace it looks like by next week we’ll post the first year over year inventory gains.”
There are two main sources of housing inventory – existing-homes and new homes – and both are becoming available at a rapid pace.
Existing homes inventory typically increases in the spring and peaks in early summer. The market is getting that seasonal inflow and more as it catches up to last year’s numbers.
That additional inventory is likely from the furious pace of new construction. In March, there were more than 1.6 million housing units under construction – more than anytime since 1973.
It’s important to note that this includes all housing units, not just single-family homes, and that construction is slow and expensive due to shortages in lots, labor, and materials.
Inventory may be headed for its first year-over-year gain in three years, but the market is still a long way from balanced. According to Redfin, there was a 1.1 months supply of single-family homes in March. Six months is considered balanced.
In a Zillow survey of 100 housing experts, 38% said they expect inventory to “recover” by the end of 2024, while 37% said the end of 2023.
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2. Existing-home sales are on a three month slide
In April, existing-home sales decreased for the third straight month, falling 2.4% from March and 5.9% from one year ago, according to the National Association of Realtors®.
Existing-home sales tracks completed sales of single-family homes, townhomes, condos, and co-ops. Earlier in the year, cooling sales was largely chalked up to record-low inventory. However, now it appears eroding of affordability is dragging down demand.
“Higher home prices and sharply higher mortgage rates have reduced buyer activity,” said Lawrence Yun, NAR’s chief economist. “It looks like more declines are imminent in the upcoming months, and we’ll likely return to the pre-pandemic home sales activity after the remarkable surge over the past two years.”
As a result of slower demand, total housing inventory increased 10.8% from March to April. By the end of April, there was a 2.2 months supply of unsold inventory, up from 1.9 months in March. Six months of supply is considered balanced.
3. Price drops are at a 6-month high
In a blazing hot market, sellers rarely need to reduce their list price to attract buyers. In fact, they usually field multiple offers that drive up the list price.
But price drops are becoming more common as 15% of sellers dropped their price in the 4-week period ending May 1, up from 9% during the same period last year, according to data analysis by Redfin.
Meanwhile, Altos Research has the price reduction rate at 19.8% for the first week of May. Data collection methods vary between companies, but both Redfin and Altos are showing an upward trend in price drops.
While more buyers may find themselves benefitting from a price reduction, the market still heavily favors sellers.
“Homebuyers continue to be squeezed in nearly every way possible, which is causing some to take a step back from the market,” Redfin Chief Economist Daryl Fairweather wrote in the report. “Unfortunately for buyers hoping to find a deal as competition cools, sellers are pulling back even faster, which is keeping the market deep in seller’s territory. So even though price drops are becoming more common, most homes are still selling above asking price and in record time.”
4. Bidding wars are trending down
With far more buyers than sellers in the market, competition between buyers has increased significantly in the last two years. In April 2020, less than 35% of listings received more than one offer, known as a bidding war. In February 2022, 66.7% of listings featured bidding wars.
That share dropped from 66.7% to 65% from February to March, according to Redfin — another sign that supply and demand are headed toward balance.
“We expect bidding wars to ease further in the coming months as rising mortgage rates price more buyers out of the market,” Fairweather wrote in a report. “That should provide some relief for people who can still afford to buy, as they’ll likely face fewer competing offers and may no longer need to offer drastically over the asking price in order to win.”
5. The homebuyer demand index is falling
Redfin’s homebuyer demand index (HDI) measures demand based on requests for home tours and other services from Redfin agents. In April, the index sharply declined as rising mortgage rates started to turn off homebuyers.
As the graph shows, the homebuyer demand index is very reactive to mortgage rates. In April-June 2020 (the gray line), HDI surged as mortgage rates fell into the low 3’s. Then in April 2022, HDI fell as mortgage rates crept into the 5’s.
This is an early indication that mortgage rates in the 5’s are indeed cooling demand.
6. Immediate sales are becoming less common
Just like it sounds, immediate sales are when homes go under contract almost immediately after listing. Incredibly fast sales prevent inventory from building and increase competition between buyers.
According to Altos Research, the share of immediate sales fell from 33% to 27% in the last six weeks. That’s good news for homebuyers as it translates to more inventory to choose from and more time to make decisions.
While there are early indicators that the market has peaked and will change course in 2022, it’s important to remember that it’s likely taking the path of the most boring roller coaster in the world. It’s been a long, uphill climb. Now buckle up for an even longer, slower descent.