By: Sarah Hansen, July 12, 2022

https://money.com/housing-market-cooldown-signs-predictions/

Talk about a turnaround: After two years of extreme bidding wars, packed open houses and sky-high prices, the housing market is finally starting to cool off.

While experts generally agree that the United States is not headed for a housing crash like the one that precipitated the Great Recession, some say there’s a risk of a correction — a type of pullback that’s typically more common and less intense than a crash.

Whether you're predicting a cooldown or correction (or neither), there’s no doubt the housing market today is very different than it was in 2020. Nobody can predict the future, but for those determined to read the tea leaves, here are five signs the U.S. housing situation may be finally slowing down:

Inventory is growing

A serious inventory shortage was one of the biggest drivers of increased housing prices during the pandemic. Demand was booming thanks to the proliferation of remote work, but there just weren’t enough houses for all the people who wanted to buy (in the places they wanted to buy, at least).

The housing supply is still significantly smaller than it was before the pandemic, but the crunch is beginning to ease. There were 1.16 million unsold homes on the market at the end of May, according to the National Association of Realtors (NAR) — a 13% jump from the previous month.

And in June, there were 19% more active listings on the market compared to a year earlier, according to data from Realtor.com. That’s the biggest annual increase since Realtor.com began tracking that metric in 2017. The gains have been especially large in former pandemic hot spots like Austin, Texas, which saw a 145% surge in inventory on an annual basis last month.

Sales are slowing

As inflation pushes prices higher, the bear market takes a toll on portfolios and mortgage rates remain elevated, Americans aren’t buying as many houses as they did last year.

Sales of existing homes fell 3.4% between April and May. They were down 8.6% compared to May 2021, according to NAR. Meanwhile, sales of newly constructed homes dropped 6% on an annual basis, U.S. Census Bureau data shows.

“Home sales have essentially returned to the levels seen in 2019 — prior to the pandemic — after two years of gangbuster performance," NAR Chief Economist Lawrence Yun said in a news release, adding that he expects sales to fall further in the months to come.

Mortgage applications are falling

As record-high inflation persists and recession fears mounts, the Federal Reserve has been rapidly raising its benchmark interest rate this year in an attempt to prevent the economy from overheating. When the Fed tightens the strings on the economy by making it more expensive for banks to borrow from one another, banks generally raise borrowing costs for consumers.

So mortgage rates have doubled — surging from 3% to nearly 6% — in past six months, forcing many hopeful homebuyers to step away from the market.

Rates have slid a bit since peaking in June, but buyers are still wary. Mortgage applications for the purchase of single-family homes during the week ending July 1 were down 17% compared to the same week in 2021, according to data from the Mortgage Bankers Association.

Buyers are backing out of deals

Some 60,000 home purchase agreements fell out of contract in June, according to data from real estate brokerage Redfin. That’s 15% of all homes that went under contract in that month — and the largest share of failures since the beginning of the pandemic.

“The slowdown in housing-market competition is giving homebuyers room to negotiate, which is one reason more of them are backing out of deals,” Taylor Marr, Redfin's deputy chief economist, said in a news release.

He went on to suggest that rising rates are another reason more buyers are canceling sales. For example, “if rates were at 5% when you made an offer but reached 5.8% by the time the deal was set to close," Marr said, "you may no longer be able to afford that home or you may no longer qualify for a loan.”