Is the Housing Market Slowing Down?

After the financial crisis of 2008, which was partially brought about by speculative lending to poorly qualified buyers, many people expected the housing market to finally cool down. But a funny thing happened on the housing market’s road back to sanity. The Federal Reserve was desperate for a way to stimulate the economy so it lowered interest rates dramatically. 

In fact, it lowered rates to such an extent that borrowing even $1 million to buy a house left buyers with manageable mortgages. This sparked another 14-year surge in home prices that only now looks to be abating. All of this begs the question: Is the housing market finally slowing down?

Is the Housing Market Slowing Down?

A number of economic indicators point to a general slowdown in the housing market. But “slowing down” is a relative term. Think of a car doing 120 mph. If it decelerates to 100 mph, it’s going slower but still moving awfully fast. 

The housing market may no longer be white hot, but it’s still red hot by historical standards. The auction-style home purchases, where buyers were pitted against each other in a race to the top, have slowed down but not ended entirely. Recently, a home in trendy South Pasadena, California, was listed for $1.2 million and ended up selling for an astronomical $2.5 million — more than double the asking price. 

In most of America’s prime real estate markets, prices are still incredibly high, and affordable homes are in short supply. From New York to San Francisco, only the most well-heeled buyers who can make cash offers succeed at finding homes. So, even in spite of the relative cooling off you might be reading about, the reality is that the housing market is still posing very real challenges to most buyers. 

Are Mortgage Rates Rising?

Have you ever heard the expression “money is cheap”? When someone says money is cheap, they mean they are able to borrow money at a low interest rate. Historically, one of the major constraints on the housing market has been mortgage rates. Aside from home prices, few things impact people’s buying power like mortgage rates. For the past 10 or 15 years, the Federal Reserve kept interest rates very low, meaning money was cheap for borrowers. 

Imagine borrowing $1 million on a 3% fixed annual percentage rate (APR) mortgage. You’d be looking at roughly $30,000 per year or $2,500 per month in interest alone on your house note. On a 30-year note, add $4,000 in principle, interest and insurance and you have a $7,000 per month mortgage. It’s a lot, but it’s doable, especially as the house appreciates. The Federal Reserve, which lends money to mortgage lenders, made those kinds of buyer-friendly terms have been made possible.

The Fed recently raised the interest rate at which it lends money to mortgage lenders as a way to combat inflation. What’s more, it’s signaled its intent to raise rates several more times this year. All of this will have an effect on home buyers and their buying power. 

Let’s go back to our $1 million loan at 3%. If the APR is now 6%, the buyer will be looking at $60,000 a year in interest, or $5,000 per month. Add that to the $4,000 principle, property taxes and insurance, and you could have a $9,000 house note. Every time the Federal Reserve raises interest rates, mortgage rates go up, and as you can see, it has a huge impact on borrowers’ buying power. 

Are Sellers Slashing Home Prices?

This answer to this question comes down to the old adage about whether real estate is a good deal or not: location, location, location. Many of the nation’s real estate markets are seeing prices hold relatively steady, while prices in growth markets like Phoenix and Orlando are rising rapidly. 

Realtor.com recently reported list prices for April 2022 were 13% less than prepandemic prices for the same month in 2017 through 2019. However, even with that statistic playing out nationally, home prices in major metropolitan areas in the U.S. are up 9.1% over a year ago. The same study showed that the nation’s median home price of $425,000 is up 32% over April 2020 when the pandemic was wreaking havoc worldwide.

While prices are down in some markets, whether you benefit from that as a buyer largely will depend on where you are. If you’re in Houston, or another major metropolitan area, houses will likely be more expensive than the same time last year. Sellers may be dropping prices in some markets but not enough to wipe out the steady rise of home prices during the last 10 years. 

As inventory drops, prices could rise once again. However, you will not see the sort of bidding wars that you got in the heart of the COVID pandemic.

Are Average Mortgage Payments Rising?

Mortgage payments are going up. First, home prices are up so most homebuyers will borrow more money to complete their purchases. Higher prices and higher loan amounts mean higher mortgage payments. 

Second, as it gets more expensive for mortgage lenders to borrow money from the Federal Reserve, they have no choice but to pass that cost on to borrowers in the form of increased interest rates. If interest payments go up, mortgage payments rise with them.

The only way you can keep that from impacting your mortgage payment is to put more money down at closing so you borrow less money. If you’re not in a position to do that, your mortgage payment will be higher. Many buyers across the country are adjusting to a new reality of the decreased buying power that comes with a sharp spike in interest rates.

Are High Home Prices Sustainable?

That’s the million-dollar question. Historically, supply and demand have been the biggest factors influencing prices. If something is in low supply or high demand, the prices will typically be high. When it comes to the housing market, there are still more potential buyers than homes for sale. In many cities and states, zoning requirements or other regulations have put constraints on the ability of homebuilders to meet demand. 

That supply crunch creates an incredibly high demand for existing housing. The high demand will continue to keep housing prices high. That’s especially true in large metropolitan areas, which is where most of the highest-paying jobs are. As long as that imbalance between housing demand and supply exists, high home prices are probably here to stay. 

Another factor keeping home prices high is that for many years, institutional investors who bought real estate concentrated their efforts on multifamily residential properties. However, several of them recently switched their focus to acquiring large portfolios of single-family homes and renting them out for passive income. They have incredible buying power and make all-cash offers. The pressure these funds exert on the market will help keep home prices high. 

How Can You Cope With High Home Prices?

Even as the housing market cools in some areas, the astronomical gains it has made in price for the last two decades will not be erased anytime soon. As a prospective homebuyer, this leaves you in a bit of a quandary. What’s more, as mortgage rates rise, you will likely be making higher payments for whatever you buy, even if you manage to buy it for less than it was a year or two ago. 

So, what should you do? As the saying goes, “If you can’t beat them, join them.” You can become a real estate investor yourself and generate passive income. A wide variety of real estate crowdfunding platforms allow you to invest in individual real estate properties. Real estate investment trusts (REITs) also are an option. If you invest wisely, you can get off the sidelines and grow your wealth instead of wondering what’s going to happen next. If you’d like pointers on where to invest, take a look at this list of Benzinga’s best real estate investing platforms.

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