Mortgage Loans

Slowdown in Housing Market: Friend or Foe for Buyers?

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    • FNBO

      Nov 18 2022

Slowdown in Housing Market: Friend or Foe for Buyers?

Inflation, supply chain constraints and rising interest rates have pumped the brakes on the housing market over the past several months. New home sales dropped 10.9 percent in September of 2022, following a similar decline in August. While the recent trend may seem like bad news to sellers, a market slowdown is often the incentive buyers have been waiting for, as lower prices typically follow falling demand.

So, exactly what can we expect from housing sales in the year ahead? There is no crystal ball to forecast with complete certainty, so it’s important to start your homebuying journey by selecting a loan officer. Whether you’re a first-time homebuyer, step-up homebuyer or downsizing, discussing your options with a loan officer will help equip you with the knowledge you need to navigate any market. Your loan officer can help you estimate your monthly payments and calculate closing costs as you develop your budget. They can even connect you with local real estate agents with whom they have good experiences. Talk about a win, win, win!

A Look at the Current and Future Market

Following the start of the COVID-19 pandemic, new home sales rose in 2020 to the highest level since 2006, as low interest rates lured new buyers into the market. While sellers cheered, it wasn’t all smiles and hurrahs for buyers as inventory remained on the slim side, hitting an all-time low in May of 2021.

A lack of homes on the market combined with the flood of new buyers and inflated home prices made it difficult for anyone seeking to purchase a home. Scarcity in the market also led to a highly competitive environment, dare we say, "bidding wars," where houses routinely sold above asking price.

Then, in 2022, the lights on the home market fiesta began to dim as rising inflation made inroads across the country. To stem the tide, the Fed raised interest rates again in early November[i], boosting mortgage interest rates for a 30-year fixed loan to around 7 percent, hitting a 16-year high.

Unfortunately, what this means for homebuyers in the year to come isn’t cut and dried.

Simple supply versus demand reasoning would indicate that home prices should be falling as fewer buyers pursue home purchases, but the current market seems to defy that logic. As the number of new home sales fell throughout May and June, home prices continued to rise, though at slower rates than we’ve seen over much of the past two years.

Zillow predicts that home prices will soar a total of 17.8% by February 2023 on a year-over-year basis, as supply remains tight. Other experts agree that home prices will continue to rise, though modestly throughout 2023, while Fannie Mae predicts that home prices will decrease by 1.5% in the new year. While rising home values may sound like good news for sellers, higher home prices combined with rising interest rates, may discourage buyers. Likewise, falling home prices may not be enough to tempt buyers in the face of rising interest and inflation rates.

Buy Now or Wait?

With rising interest rates affecting affordability for some, homebuyers may find themselves with a silver lining in what has been a challenging market. Increasing interest rates reduce the number of qualified purchasers in the market, which is slowly swinging in favor of buyers. Those shopping for homes are less likely to find themselves in those bidding wars, waiving home inspections or paying far over asking price. Locking in an interest rate now will protect buyers from further rate increases, and it won’t prevent homeowners from future refinancing should rates drop.

As buyers decide whether to purchase now or wait, statistics may help inform decision making. However, buyers also should consider the potential downside of trying to time the market. For example, buyers who wait for sale prices to fall before purchasing could find themselves pushed out of the market altogether if interest rates and housing prices continue to rise.

It’s also important to pay close attention to the activity in your local market. The media often portrays national data that may be different than what’s happening. If you are concerned about interest rates, take solace in knowing that many homeowners will refinance their homes in the future when rates drop, which will in turn lower their monthly payment. Historically, home values continue to rise over time, which is a great way for a consumer to build long-term wealth as compared to paying rent.

In the end, deciding whether to buy or to wait is a personal decision, based on individual factors, such as:

  • How much will you pay for a mortgage versus what you pay to rent? In some cases, renting may remain a more economically viable option.
  • How much do you have to put down on a new home purchase and will providing the down payment leave you without a nest egg?
  • Do you have the stomach for the competitive negotiations necessary when purchasing a home in today’s market?
  • Will you have the fortitude to wait for the right property if you decide to see where the market goes and inventory shrinks?
  • Can you still afford to purchase a home if interest rates continue to rise? Inflation is another factor to consider and its impact on other expenses in your budget.

This is where a professional loan officer can help you make sense of the financial implications of waiting versus buying now. Your mortgage professional can’t see the future, but they do have the expertise to help you make a good decision for your personal or family financial situation.

The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.