I don’t need to tell you that the U.S. housing market has been hot lately. (Sizzling is a better work, actually.) You hear about it almost every time you turn on the news or read a paper.
Tight supply conditions and strong demand have increased competition among home buyers. That’s the current state of the housing market, as of summer 2021.
But what about later this year and into 2022? Could the U.S. real estate market cool down over the coming months? It just might. Many industry forecasters and analysts predict a slight cooling trend later in 2021, and into 2022.
Of course, that’s all speculative and far from certain. But we do have some factors in place that could “chill” things down a bit in the near future. Here are three things that could slow home sales and cool the housing market over the coming months…
Three Things That Could Cool the Housing Market
Tight inventory conditions, soaring prices, and frustrated home buyers. These and related factors could have a cooling effect on the U.S. real estate market through 2021 and into 2022.
1. Inventory is expected to remain low for some time.
In a forecast published earlier this month, the research team from Freddie Mac outlined some of the key problems within the housing market as of summer 2021. One of the biggest challenges for home buyers has to do with a lack of inventory. The situation has been going on for some time and has actually gotten worse over the past year.
The short version is that there just aren’t enough homes for sale to meet the demand from buyers. And that probably won’t change significantly anytime soon.
According to Freddie Mac’s latest forecast, published in July: “the U.S. housing market will continue to struggle with a shortage of available housing for many months to come.”
Here’s a small ray of light for buyers. A July 2021 report from Realtor.com showed an increase in the number of new listings coming onto the market. From May to June of this year, new listings rose by nearly 11%. That was more than expected.
But when you look at total housing market inventory, you’ll see that conditions are still fairly tight. In fact, total inventory was down by -43% in June 2021, compared to a year earlier.
Over the past year, these tight inventory conditions have accelerated home sales by boosting competition among buyers. That’s usually how it works. Lately, however, it appears that the supply shortage is slowing sales activity. A combination of low supply and fast-rising house prices are currently causing some buyers to back out of the market altogether. (See Freddie Mac quote below.)
2. Home prices are still soaring, squeezing out many buyers.
Higher home prices could also create a cooling effect in the housing market over the coming months. In most U.S. cities, home values have risen steadily and substantially over the past year or so. This is largely due to the lopsided supply and demand situation mentioned earlier.
To quote Freddie Mac’s July 2021 housing market forecast:
“The rapid run up in house prices may be starting to exhaust potential homebuyers. We’ve seen indications of softening demand in recent home purchase mortgage applications data. And, while sales metrics remain above pre-pandemic levels, the pace of sales has cooled since the first quarter of this year with home sales slowing for the past four consecutive months.”
According to the real estate data company Zillow, the median home value for the United States rose by 15% over the past year. That’s miles above the 3% – 5% annual average of the past 40 years. Looking forward, they predict that U.S. home values will rise by around 13% over the next 12 months. This forecast extends into the summer of 2022.
As house values continue to climb, fewer and fewer home buyers will be able to afford a purchase. In other words, rapidly rising prices are shrinking the pool of buyers. This reduces the overall demand for housing and could cool the real estate market down later in 2021 or 2022.
3. Buyers are getting fatigued, frustrated and fed up.
With inventory tight and prices soaring, many home buyers have simply gotten fed up with the housing market. Some are backing out of the market and waiting until things cool down.
According to Fannie Mae’s “Home Purchase Sentiment Index” for June 2021, a lot of folks think it’s a bad time to buy a house right now. In their most recent survey, 64% of respondents said it was a bad time to buy a home in the U.S. That was up from 56% during the previous month. Affordability concerns were a key factor in this.
Additionally, 77% of survey respondents said they believe it’s a good time to sell a house right now. That was a 10% increase from the previous month.
And guess what? Both groups are right. It is a tough time to buy a house right now, due to the reasons outlined earlier. On the flip side, it’s a great time to sell a house in 2021. In most housing markets across the country, sellers simply have to list their properties and wait for the offers to pour in. And some of those offers will likely be more than the asking price.
The bottom line here is that increased frustration among home buyers could lead to a reduction in demand going forward. To state it mathematically: low inventory + soaring prices = frustrated buyers.
These and other factors could cause the U.S. real estate market to cool down a bit later this year or next.
Disclaimer: This report includes housing market predictions and forecasts extending into 2022. Such outlooks are the equivalent of an educated guess and should be treated as such. The Home Buying Institute makes no claims or assertions about future real estate market conditions.