The Housing Market Shows Signs of Softening—Has It Topped Out?

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For many months now, it’s seemed like nothing could slow down the American housing market. But wait! The tide may be beginning to turn—even if just a little.

Over the past few weeks, the rate of price growth has begun to slow and fewer buyers are seeking mortgages to purchase homes. The competition for available homes, while still formidable, may not be quite as intense as it’s been. And this could provide buyers a sorely needed opening.

“The market’s topping out,” says Mark Zandi, chief economist at Moody’s Analytics. It’s “starting to show cracks. It feels like we’ve hit the apex, and we’re moving to the other side of it.”

That does not mean there’s a bubble on the verge of popping and that prices are about to plummet in a free fall reminiscent of the last housing bust, according to economists and housing experts.

Median home list prices are still more than 12% higher than they were the same time a year ago. But a combination of homebuyers being priced out of the market, a severe shortage of properties for sale, fears of another real estate bubble, and a return to pre-pandemic life may have dampened the full-throttle demand we’ve been seeing all year.

This could result in fewer bidding wars and more reasonable offers over the asking price. And it might just provide the opening that many weary buyers need.

“Buyers may be taking a break from the housing market, “says Realtor.com® Chief Economist Danielle Hale. “There have been signs that the momentum in the housing market is slowing. The competition might not seem as intense as it’s been in the last few months.”

In the week ending June 19, median home list prices were up 12.2% over the same month a year ago, according to the most recent Realtor.com data. While this stunning, year-over-year increase may not immediately invoke the idea of a market cooling off, it’s less than the 17.2% annual jump in prices in April, indicating slower price growth.

To be clear: Some of April’s rise was due to the comparison to a year earlier. April 2020 was the beginning of COVID-19, when local restrictions and general fear over the virus hampered real estate markets. But that’s not the whole story as in January of this year, when prices were up 15.4% compared with January 2020, which was well before the pandemic.

Meanwhile, fewer buyers are getting mortgages to buy homes.

The number of purchase mortgages dropped 14.2% year over year in the week ending June 18, according to a survey of lenders issued by the Mortgage Bankers Association. It also fell compared with four weeks ago. (Refinances, while also down, were not reflected in this percentage.)

While some of this is because last year’s housing market was in flux as COVID-19 stalled sales, it could also be an indication of a general overall softening.

“There are certainly some signs that might indicate that a slowdown is near,” says MBA economist Joel Kan. But he expects the number of folks receiving mortgages to buy homes to rise this year, mostly driven by higher-end buyers.

“It’s a bit too early to tell,” he continues. “If we see price growth stay in the double digits, you are going to get to the place where some potential buyers might pull back.”

Why high home prices aren’t expected to fall anytime soon

Reality check: Home prices nationally aren’t expected to actually go down anytime soon. They’re still expected to keep climbing. But many real estate experts predict a deceleration and that home price growth could be in the single digits by the end of the year.

“Prices have got to start moderating. Laws of housing gravity say prices can’t continue rising at double digits. It’s just not supportable,” says Zandi. “The market is hitting the limits to what kinds of prices we can see.”

Home prices are unlikely to drop because of laws of supply and demand: There are still more people who want homes than there are places for them to live. Builders have been unable to put up new residences fast enough, constrained by labor shortages, zoning laws, fast-rising prices for lumber, and delays on receiving major appliances.

Meanwhile low mortgage interest rates—for a time touted as the lowest we may see in our lifetime—are also continuing to juice demand.

“Prices are still at record highs, and I expect them to hit another record or two this summer,” says Hale. “Buyers aren’t going to get a deal, but they might be competing with fewer offers.”

Sellers are expected to keep prices elevated. They’ve seen their neighbors’ homes recently sell for exorbitant prices and are thinking to themselves they have an extra bedroom, more acreage, or a newly remodeled kitchen. So their home should fetch even more.

They may hold out for more money. If the bidding wars they’ve envisioned don’t materialize, they could remove the “For Sale” signs from their front yards. Fewer properties for sale mean higher prices.

“I don’t think sellers are going to sell below the price that they see in the market today. That price becomes the floor on what they’re willing to sell for,” says Moody’s Zandi.

Why the housing market is beginning to soften

However, as more folks return to offices, that could alter housing demand, and cool down some markets. Folks may be less willing to move farther out when faced with the prospect of long commutes. Plus, they may not need as much space now that the kids are going back to in-person schooling and gyms are reopening.

“The surge in demand created by the work-from-anywhere phenomenon is starting to fade,” says Zandi. “People may be rethinking living in the middle of Utah or in Tampa, or wherever, and start going back.”

The Great Unfreezing of America is providing a host of distractions for buyers. There are concerts and sporting events, and vacations and restaurants, and all kinds of other things competing for their down payments. Buyers may not want to max out their budgets on a house when there are other things they can spend their money on.

Many buyers are also frustrated by the lack of homes for sale and can’t afford the double-digit price increases that have become par for the course over the past year. They’ve had it. So they’re sitting it out until prices, offers over asking, and bidding wars calm down.

It’s “a buyer’s protest,” says Ali Wolf, chief economist at the building consultancy Zonda.

In April, builders surveyed by her firm reported that about 20% of buyers were nervous about higher prices. In May, buyer hesitancy was closer to 40%.

“We’re starting to hear some people say they’re afraid about buying at the top,” she says. “We’re seeing for the first time in a year some buyers choosing to sit on the sidelines.”

Many people remember all too well the housing bust that precipitated the Great Recession. They see parallels between today’s market and the real estate mania of the mid-2000s—when investors and buyers flooded the market, bidding up just about everything in a frenzy. They don’t want to buy a home at what they believe is the top of the market just to watch their values fall.

However, a true bubble is unlikely as there are fewer homes for sale and more buyers—a complete reversal from the last time around.

More importantly, mortgage lending guidelines were tightened to prevent borrowers who can’t pay back their loans from getting them. It was homeowners defaulting on their loans that led to the financial disaster.

Lenders “don’t want to lose money,” says Hale. “They’re worried that this runup in prices will end the way the last one did.”

Why any slowdown could lead the housing market to pick right back up again

A less heated real estate market may present a welcome opportunity for buyers—but conditions could reverse quickly. In an ironic twist, many of those aspiring homeowners who took a break from the open houses and bidding wars may jump back into the fray as the market begins calming.

“The buyer pool is deep enough to keep the housing market strong,” says Zonda’s Wolf. “We’re not expecting it to become a buyer’s market anytime soon.”

Real estate experts don’t believe the market will really slow down until mortgage rates significantly jump up. Currently, they’re hovering around 3% for 30-year fixed-rate mortgages. While they fell into the mid-2% range last year, rates are still at historic lows, making mortgage payments more affordable for buyers. If they shoot up, that equation will change.

“House prices have risen so much so quickly,” says Moody’s Zandi. “You combine that with just a small increase in mortgage rates, and housing becomes unaffordable in many markets.”

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