The four key signs to a housing market rebound
Like most things over the past couple of years, the housing market has experienced its fair share of unprecedented times. From record-low rates to record-high home prices, it’s been both the best of times and the worst of times—often depending on which side of the homebuying fence you’ve found yourself and at which moment in time.
What fueled the fire
With historically low mortgage rates from 2020 to 2021, buyers were entering the market by the minute, driving the demand for homes at a time when supply couldn’t keep up. Prospective buyers and sellers watched as homes were swept off the market within hours, buyers going to great lengths to seal the deal, including bypassing inspections or putting in offers without seeing a home in person.
Home prices began to soar, but despite that the competition stayed fierce. A higher-than-usual home price didn’t matter for many when the mortgage rates were so low. It all came down to being able to afford the monthly payment. But as rates have risen over the last two years, many buyers began to be priced out. And now there aren’t as many homes available on the market, fewer than we’ve seen in years.
With a portion of buyers retreating to the sidelines, will we see the competition cool off? What can we look for in terms of the housing market returning to some semblance of normal? And if you’ve been priced out of the market, when will that all-important monthly payment seem feasible?
While average mortgage rates aren’t likely to reach 2.65% again anytime soon, there are other economic indicators that could allude to a housing market that looks, dare we say, normal? And for this, we look to the Housing Market Recovery Index, a resource developed by realtor.com® that tracks the national housing recovery.
Here’s what to watch for…
Increasing inventory
Even before the onset of the pandemic, inventory had been an issue. Experts were calling for new construction, pointing to shrinking inventory and the potential for demand to outweigh supply. Once the buying frenzy began, inventory shrank even faster, and the predictions rang true.
With fewer homes for sale, the homes that were for sale continued to climb in price. In February 2022, data uncovered that there were 400,000 fewer affordable homes on the market for households earning between $75,000 to $100,000 than compared to two years prior before the pandemic unfolded.
Lawrence Yun, Chief Economist at the National Association of Realtors® (NAR), commented on the alarming numbers. “The housing wealth gain has been sizable over the past two years. However, due to the ongoing inventory shortage and rising interest rates, homeownership attainment will become especially challenging unless drastically more housing supply is available.”
Throughout the summer, housing inventory has held somewhat stable, only growing slightly.
The time on the market
Ask any agent, the days on the market (often referred to as DOM) matter. The longer the home spends on the market, the staler it becomes, leading way for potential negotiating when it comes to asking price. The less time a home spends on the market, the better for the seller. And that goes beyond just selling their home quickly.
After months on the market, people tend to wonder what’s wrong with a home. Whether it’s overpriced from the start, it has underlying issues or it just hasn’t found the right person at the right time, those critical days on the market construct people’s perceptions of a home.
In the midst of the uber competitive market that unfolded over the past two years, the days on the market hovered near record lows. In July of 2022, 82% of homes sold were listed for less than a month, with properties typically remaining on the market for only 14 days—the fewest days on market since NAR began tracking the data 11 years ago.
While we don’t want to see homes sitting on the market for months on end, a slight decline could be a welcome change for buyers who have watched homes vanish before their eyes without having a chance to even view a property in person. The key is for this slowed-down pace to be due to increased inventory and a flourishing housing market, not just stagnant listings.
We’ve already witnessed a slight increase in pace, as May numbers showed homes spent an average of 18 days on the market. Though this is still many days fewer than a more typical pre-pandemic market
Housing prices leveling off
In order for prices to dip down, the competition needs to cool off. When mortgage rates hit record lows, home prices spiked but still remained affordable from a monthly payment standpoint. As rates have climbed back up to more typical numbers, the number of buyers who can afford the higher-priced homes is dwindling, causing contract signings to fall. This is causing home prices to level off.
In February 2023, the average home price went down from the year before for the first time in a decade. Since then, prices have kept falling year-over-year. In May, the average home price was $396,100, down 3.1% from May 2022.
If home prices start leveling off, it’s likely more buyers will be able to re-enter or enter the market and contract signings will pick back up. Realtor.com®’s Chief Economist, Danielle Hale, explains that as buyers continue to navigate high costs from price gains and mortgage rate increases, sellers will likely need to be more willing to bring their prices down. Which leads us to our fourth economic indicator to be on the lookout for…
Home shopping activity picking up
With an increase in inventory, we could see a slightly more buyer-friendly market and watch as some of the previously sidelined buyers return. Though experts predict the market won’t exactly move away from the seller’s favor anytime soon, a slight cool down could help buyers stay in the game, and therefore help the market begin its rebound.
Mortgage rates will of course play a factor, too, as ultimately their record-lows kicked off the initial buying frenzy. The normal ebb and flow of the market was thrown off as buyers with no previous plans to buy a home in the near future suddenly jumped at the chance to take advantage of historically low rates.
It’s important to remember why those rates dipped so low in the first place. In an effort to limit economic damage and reduce market volatility that the pandemic had the potential to run wild with, the federal government started purchasing mortgage-backed securities. Mortgage rates sank and the housing market soared.
But what goes up must come down and what goes way down eventually must come back up (at least for this housing market). Though it’s important that these things happen in correlation with one another. Right now, with higher rates and higher home prices, monthly mortgage payments are looking grim. A report by Redfin showed that a typical mortgage payment is 30% higher today than it was just a year ago.
In order for the housing market to rebound, we’ll need to see this number come down. What matters here is the math—what buyers come out with as far as their month-to-month payments. Many buyers don’t care if the housing price is higher or the mortgage rate is lower, just whether they can afford their monthly payment. Of course, there’s always the opportunity to refinance down the road, so there is definitely a difference in whether a home price or mortgage rate is on the high side, but regardless, the monthly payment needs to be more attractive to get home shopping activity up.
We’ve watched a lot of cause and effect in terms of what happens next in the market. A lack of inventory leads to fiercer competition between buyers, which leads to a seller’s ability to raise their asking price. For home shopping to pick up, the other indicators need to find a healthy alignment.
Whether you’re keeping an eye on the market because you’re looking to buy or you’re looking to sell, keep in mind that timing the market can be a tricky task. And what makes sense for you might not make the most sense for someone else. Try to avoid panic buying or panic selling—panic anything—by surrounding yourself with experts in the field. A good agent and a good loan officer can help you make the best decisions.
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