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The heated real estate market that has seen home prices across the country soar to record highs since the start of the pandemic is showing early signs of cooling, according to experts and recent data.
Sales of existing homes nationwide were down 2.7% between February and March, according to the National Association of Realtors. Sales decreased 4.5%, and home showings fell 19% from the same time last year. According to the group’s most recent data, pending home sales slipped by 4.1%, too.
“After two years of super-heated market conditions, home sales are retreating back to pre-Covid days,” Dr. Lawrence Yun, chief economist at the National Association of Realtors, told the Washington Examiner magazine by email.
Redfin, an online real estate brokerage, reported declines for March as well, finding that the number of home sales had dropped 3.7% since February and 8.1% since last year.
The early signs of a housing market cooldown follow the central bank’s decision last month to increase interest rates for the first time since 2018 to tamp down 40-year inflation highs across the board on goods and services. The Federal Reserve has signaled further interest rate hikes will come in the months ahead.
As a result, mortgage rates have surpassed 5% for the first time in more than a decade, increasing the financial burden of buying a home and pushing some homebuyers to reconsider their plans, experts said.
“We expect the combination of surging mortgage rates and record-high home prices to cause more homebuyers to drop out of the market,” Redfin Chief Economist Daryl Fairweather said in a news release on April 15. “Unfortunately, homeowners are turning their back on the market, too. Instead of being motivated to list before prices weaken, potential home sellers may be choosing to wait out the impending market cooldown.”
The early signs of a slowdown could mark the beginning of the end of a record-breaking period for the real estate industry in recent years — a period during which homes regularly sold for hundreds of thousands of dollars more than their list prices. Experts predict that lower home price growth is on the horizon as some buyers begin to bow out in the face of rising costs, thus reducing competition and reining in sale prices.
“While there is plenty of fuel in the tank as home-shopping season kicks into gear, there will be a point when the cost of buying a home deters enough buyers to slow price growth, and signs are emerging that we may be nearing the peak for home value appreciation,” Zillow, another real estate website, said in its March 2022 market report.
“Newly pending home sales this March lagged behind their pace from a year ago, with 19% fewer than in March 2021, after February notched a 15% year-over-year decline,” the company said. “The slowdown in sales volume could be attributable to the one-two punch of high prices and rising mortgage rates denting demand this spring.”
Month-over-month home sales decreased the most in the Midwest, according to the National Association of Realtors, slipping 4.5% in March. Next was the South with a 3% drop, then the Northeast with 2.9%, “while the West was flat,” the group said. But all four regions are down since last year, with the Northeast dipping the most, at 11.8%.
Low inventory has driven up sale prices in the last year, with supply chain problems limiting materials and driving up costs. But last month showed some improvement in that regard, with housing starts, representing construction that started on new residential housing units, rising 3.9% since March 2021, according to the Census Bureau. Building permits were also up 6.7%.
“With supply chain issues and high input costs persisting, builders beat expectations and the pace of starts from a month earlier,” Zillow said. “Perhaps more notable is that new permits also moved slightly higher, which may be a sign that builder confidence in the future outlook of home sales is holding at these recent highs.”
“For months, builders have kept their foot on the gas amid persistent supply shortages and rising prices, and March’s construction figures indicate that they’re still ready to push ahead,” Zillow added.
But for homebuyers, the market remains ultracompetitive, experts said. Home inventory is still low and driving up the price of those on the market. “Home prices are at a record high and likely to increase still, though at a slower rate, because of rising rents and from the ongoing inventory shortage,” said Yun, the NAR economist.
Despite the March housing start figures, the National Association of Home Builders said high costs are still hampering new construction and pricing out homebuyers. “The housing market faces an inflection point as an unexpectedly quick rise in interest rates, rising home prices, and escalating material costs have significantly decreased housing affordability conditions, particularly in the crucial entry-level market,” Robert Dietz, the group’s chief economist, said in a recent press release.
With mortgage interest rates rising, Zillow said affordability is a concern. “Thus far, enough buyers have been willing and able to meet today’s asking prices to keep home values ticking up at a record pace,” the company said. “But with lengthy build times and a swelling backlog of projects to be completed, builders must take a long-term view, and their willingness to take on new projects may start to wane.”
Though data indicate preliminary signs of a cooldown, real estate statistics broke more records in March. Redfin said 54% of homes sold above asking price, “up 12 percentage points from a year earlier, and the highest March level on record.” Meanwhile, the median price of home sales was up 6.2% last month, “the fastest month-over-month gain at this time of year since 2013, to an all-time high of $412,700,” the company found.
The National Association of Realtors noted increases for existing homes, with a median price of $375,300 in March, a 15% jump since the same time last year, saying, “This marks 121 consecutive months of year-over-year increases, the longest-running streak on record.”
Zillow found that home values have risen at a similar pace. “The typical U.S. home is now worth $337,560 — up 20.6% from March 2021,” the company said. “This is the 12th consecutive month in which a new record for annual price appreciation has been set.”
The cities where home values climbed the fastest compared to the same time last year were Austin, Texas (42.7%), Raleigh, North Carolina (34.9%), and Tampa, Florida (33.1%), Zillow found. Meanwhile, growth was slowest in Washington, D.C. (11.4%), Baltimore, Maryland (11.6%), and Milwaukee, Wisconsin (11.7%).
“Demand remains strong as home buyers are snatching listings quickly off the MLS, and it takes approximately 17 days for a home to go from listing to a contract in the current housing market. A year ago, it took 18 days,” the National Association of Realtors said.
As a result of the high prices, buyers are looking for smaller and therefore cheaper homes than they were earlier on in the pandemic, Redfin said. “The typical U.S. home that went under contract in March was 1,720 square feet, down 1.8% from 1,751 square feet the same time last year and roughly the same size as the homes that were selling just before the pandemic began,” the company said.
With more people sidelined by high home prices, the rental market, which has heated up during the pandemic, could also become even more competitive. The “rental market will be hotter as more people are renewing leases rather than buying a home,” Yun said.
As for those concerned about a 2008-style housing crisis, Zillow said that’s a minor concern, saying, “A looming swing back toward a more balanced housing market should not be confused with a market crash, which remains very unlikely. In all probability, slowing price growth will not end with prices actually falling, and in fact, the market should remain hot by historical standards for many months to come.”
Zillow added: “Supply is on the upswing, and demand will eventually cool as prices rise out of reach for enough households, but there is a long way to go before we reach a supply glut, and there is plenty of pent-up home-buying demand to work through.”
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