Expect a (Slightly) Cooling Market as Winter Approaches

Expect a (Slightly) Cooling Market as Winter Approaches

Cooler weather is often a welcome relief from the dog days of summer, and a cooler market also may bring some relief to home buyers. In addition to the usual seasonal market slowdown, Lawrence Yun, chief economist at the National Association of REALTORS®, sees a market cooling trend as first-time buyers are on the sidelines due to high home prices. He also foresees a rise in rental prices, as workers return to jobs but are unable to buy homes. As always, the real estate market is sensitive to a number of factors including existing home inventory, new home construction, employment and mortgage rates. Now, supply chain issues are impacting the market as building materials, appliances and furnishings delay new construction, as well as home repairs and renovations. Here’s a look at trends to watch in the months ahead.


Rising Rates

2021 was an unusual year as historically low interest rates on mortgages, lack of inventory and a pandemic created bidding wars resulting in increased home prices, says Bankrate.com. Current average mortgage rates have increased to 3.2 percent from the January low of 2.65 percent on a 30-year fixed-rate loan, according to The Mortgage Reports. Citing increasing inflation and consumer spending, lower unemployment claims and easing of COVID fears, Mortgage Reports suggests the Federal Reserve may rein in some of its pandemic-related measures that have kept rates low.

Mortgage experts expect rates to continue to move up from the all-time bottom achieved earlier this year. In a recent MarketWatch.com newsletter, NAR’s Yun predicted home sales will drop in 2022 – at a rate of 3-5 percent – as mortgage rates rise. 


Price Point

The COVID pandemic prompted a home-buying spree with record-setting prices, according to Bankrate.“The median price of an existing home has topped $350,000 for the first time. The median price of new homes just eclipsed $400,000. This boom is a boon for sellers and a challenge for buyers, who increasingly must stretch their housing budgets.”

Home prices are unlikely to decline, says Yun, but future gains will be moderate. “Real estate has turned out to be a great investment with good financial returns. The gains will continue, but they will be more moderate in the upcoming months and years.” Housing economists agree that the boom is about to run out of steam. The Mortgage Bankers Association expects annual appreciation to cool to 5 percent by the end of 2022. NAR and the National Association of Home Builders and have similar outlooks.


Supply and Demand

Bankrate cites low inventory as the dominating factor in the housing market. “You’re dealing with the lowest housing inventory that we’ve seen in history,” said Noerena Limón, executive vice president of public policy and industry relations at the National Association of Hispanic Real Estate Professionals. She predicts challenges with inventory will remain for several months despite an increase in housing starts because home construction takes time. Robert Dietz, chief economist at the National Association of Home Builders, agreed that new home construction will not have much impact before the end of 2021.

Dietz said supply chain issues should continue easing, though some materials and appliances will continue to be affected by shortages and delays.


The Forecast

Bankrate predicts that the market will remain strongly in favor of sellers through the end of the year. “Experts say the regular seasonal slowdown in transactions will take place, and after months of extraordinary competition among buyers, winter will give everyone a chance to catch their breath.” As we near the end of 2021, the real estate market will feel a little more normal than the past 18 months. But demand for homes will remain high and the fourth quarter of this year should set things up for another busy market in 2022.