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What happens when you combine record-low mortgage rates, low housing inventory, lightning-fast sales, and soaring price gains?
A real tough time if you’re in the market to buy a home.
For prospective homebuyers, these factors make it a seller’s market for the ages.
Simply put, there aren’t enough homes to meet the current demand. “Total inventory levels got to an extreme low recently, and inventory has been falling since 2014,” says Logan Mohtashami, lead analyst with Housing Wire, a mortgage news and analysis firm. High demand creates bidding wars, further driving up home prices — and leaving homebuyers at a disadvantage.
How long will this last, and when will the tides turn back into the buyer’s favor? We asked five economists and mortgage experts when they think this unprecedented market will finally start to cool — and what you should be doing now if you want to buy.
What the Experts Think: How Long Will This Hot Housing Market Last?
Director of Research
John Burns Real Estate Consulting, a U.S. real estate research firm
Rick Palacios, Director of Research
Palacios sees signs things may be starting to normalize and flatten out ever so slightly. “What we’re hearing from home builders across the country is, ‘I used to be able to sell these things like hotcakes, and now I’m still able to sell them, but maybe it’s taking me a little bit more time,’” he says. With real estate values spiking, a number of potential homebuyers have dropped out of the market, as they can no longer comfortably afford to purchase a home.
Looking forward, we could see price increases continue, but at a much slower pace. “Our national home price forecasts for the resale market for this year [is an increase of] 14%. We think that that’s going to get cut in half and go to 7% growth in 2022,” Palacios says. So it looks like the home market will continue to favor sellers, but may not be as extreme as what we’ve seen.
Deputy Chief Economist at CoreLogic, a California data analytics firm
Selma Hepp, Deputy Chief Economist
There are signs that the hottest days of the market are behind us, Hepp says. This could be the bottom, and we could start to see more inventory gradually increase, she predicts. Though inventory is still exceptionally low, there have been some minor weekly improvements.
It’s still not anywhere near a buyer’s market, but Hepp says she believes there are signs of stabilization, such as homes receiving fewer offers. So instead of bidding against 20 other people, you may find yourself only competing with 10-15 other buyers.
Lead Analyst with HousingWire, a mortgage news and analysis firm
Logan Mohtashami, Lead Analyst
We could see rising prices put a dent in demand as some buyers are priced out of the market, says Mohtashami. As a result, people will get buyer’s fatigue and supply will pick up.
As active as the housing market has been, it’s largely what we should expect, continues Mohtashami. With the exception of home price gains, which are eroding affordability and are exceptionally high, the home sale housing data in the U.S. looks perfectly normal, he says. Mohtashami believes that pent-up demand from the lockdowns is influencing the market, meaning some of the frenzied real estate sales can be attributed to a flood of homebuyers returning as lockdowns lifted and the economy reopened.
Senior Economist with the Center for Economic And Policy Research, based in Washington D.C.
Dean Baker, Senior Economist
Today’s low interest rates have played a role in increasing buyers’ purchasing power and pumping up home sale prices. So if mortgage rates inch higher, that could help to cool the market. “In the last decade or so, house prices have become more sensitive to interest rates,” Baker says. If mortgage and refinance rates eventually begin to rise incrementally, as some experts have forecasted, that could cool the market a bit.
Chief Product Officer at ATTOM Data Solutions, a California real estate data and analytics firm
Todd Teta: Chief Product Officer
Teta doesn’t foresee prices taking a sudden tumble. Instead, Teta thinks there are signs that the market may be gradually returning to something closer to normal. “I don’t see any macroeconomic issue that’s going to cause a sudden market correction, whether that be internationally, [or] in the U.S.,” Teta says. For example, housing inventory has grown slightly in recent weeks. “So we expect that’ll continue and ease [inventory] a little bit,” says Teta.
The other factor that Teta believes will help to slowly cool down the market is rising interest rates. “What we’re expecting to happen is rates continuing to go up the rest of this year,” he says. “That in effect should tamp down demand slowly.” For home prices to dramatically fall, rates would need to spike and kill demand. Or a large number of homes would need to flood the market. Barring something unexpected, these aren’t likely scenarios.
What to Do If You’re Buying in a Seller’s Market
Today’s low interest rates have increased a buyer’s borrowing power, but rising home prices threaten to cancel it out. Here are a few strategies for a homebuyer struggling to buy in today’s market:
Delay your home purchase
If you can delay your home purchase, you may find it easier to be a homebuyer next year. “I normally don’t say to try to time the market, but … if you can hold off until early next year, that inventory situation should be better,” says Teta.
But any change in the real estate market is far from guaranteed. “That’s a big ‘if’ though,” he says. “There are a lot of variables that could keep us where we’re at and into early next year.”
Focus on your budget
If now is the right time in your life for a home purchase, then you should focus only on your personal financial circumstances and less on what’s going on in the broader market. Figure out how much house you can afford, and stick to your budget.
If you purchase a home now with a fixed-rate loan, what you pay each month won’t change if housing prices dip. As long as you’ve got the funds set aside for a down payment, have built up an emergency fund, and can still afford to save and invest for retirement, experts say it’s best not to stress about timing the market.
Use this waiting period to build a stronger homebuying case
If you decide to delay buying a home, you can still work toward becoming a homeowner in the future without actively shopping for a house. Saving up for a bigger down payment and having a higher credit score will help you qualify for the lowest interest rate possible no matter the market conditions. Putting a larger down payment on a home and taking steps to improve your credit score can put you in an even better financial position down the road, despite the potential of rates going up.
Watch out for panic buying
Don’t buy whatever house you can get right now because you’re worried prices will continue to rise forever. It’s not worth putting your financial future at risk by getting a property at the upper limit of what you can afford, especially if it impacts your savings and retirement or requires you to take on new high-interest debt with credit cards or personal loans.
The Bottom Line
Even though the experts we talked with don’t anticipate any sudden price drops, the current expectation for the future is for prices to grow at a slower pace than they have been recently.
If last year taught us anything, it’s the value of being prepared for the unexpected. Whether or not you decide to make a home purchase now or years from now, it needs to make sense for you.