- Consumer sentiment about home price appreciation is rapidly changing, according to the New York Fed.
- Mortgage applications are also down significantly compared to this same period last year.
- Some investors pulled out cash during recent refinances to jump on deals in a softening market.
After one of the most dramatic real estate bull runs in recent history, the housing market has taken a noticeable turn in recent months. More indicators are pointing to a softening real estate market, meaning that patient investors who have waited out the hot market since the start of the pandemic could be handsomely rewarded in the near future.
Fewer mortgage applications, more price reductions, and a lower anticipated home price growth all point to a softening in the market
One recent indicator that is increasingly pointing to a slowing housing market is the New York Fed’s Survey of Consumer Expectations. The latest stats from the June findings reveal that consumers expect median home price growth to slow to 4.4% in the next year. This is down from the 5.8% one-year-ahead price growth consumers had expected just in May.
In the years leading up to the pandemic, consumer sentiment on year-ahead housing price growth ranged between 3% and 4.5%. While 4.4% price growth is higher than the average estimate from consumers over the last several years, the figure has fallen steeply from the pandemic high of 6.2% in June 2021. The year-ahead median price change stood at 6% as recently as this past April.
Inflation has been cited as the main culprit in the quickly changing housing market as the Fed fights to contain the 40-year record high rate. While mortgage rates climbed steeply in the first quarter of 2022, there was some relief for home buyers when weekly mortgage rates dropped slightly in July. According to the historical mortgage rate chart from Freddie Mac, the average 30-year mortgage rate as of July 14 was 5.51%.
Further adding to the slowing housing market narrative is the Mortgage Bankers Association’s weekly mortgage applications survey. With the most recent data from the week ending on July 1, the report shows that the total number of mortgage applications is down by 55% compared to the same period a year prior. However, total mortgage applications are up by 6% compared to the previous week and nearly 3% from the previous month. Refinances are most noticeably down, falling by 5.5% in the last four weeks and over 78% in the last year.
Other key indicators on the health of the housing market include total inventory and listings taking price reductions.
Reports from brokerage Redfin hit on both of these subjects, offering insights into a slow but steady shift from the strong seller’s market the nation has witnessed in the last 24 months. According to a report on inventory, Redfin suggests that housing supply has increased for the first time in almost three years. The number of homes for sale increased by just 2% in June, while total home sales fell by 16% year-over-year.
Additionally, more sales are falling through now than in any other time since the start of the pandemic. Nearly 15% of pending home sales fell out of contract in June, the report shows. A possible explanation for the trend is high mortgage interest rates, the report suggests. As contingency periods drag on, buyers can lose their rate lock, which oftentimes changes the equation for them. But others may be backing out of deals for other reasons, such as having second thoughts about a specific home or waiting for a less competitive environment.
Having cash ready to go for when the market bottoms out
The quickly changing nature of the housing market has been demoralizing for many, particularly for millennial and Gen Z buyers who feel that home ownership is becoming increasingly unobtainable. But for those who had already built a portfolio of properties prior to the pandemic, the shifting marketing conditions could present a big opportunity for expansion in the coming months.
One real estate investor who spoke with Insider back in March pulled out over $1 million in cash through two recent refinances to have the money ready to go in the case of a significant correction.
“Now is the time to grab as much money as I can out of these assets, and then have the cash available if the market corrects aggressively,” the New Hampshire-based real estate investor said to Insider. “I don’t think it’ll be a 50% correction because we just don’t have the bad loan structures that we had in the Great
but it could be a 10% to 20% drop in prices.”
And as more properties sit on the market longer, this too could present an opportunity to add to a portfolio of units. The longer a property sits on the market, the more likely it is that the price is not competitive. And if the sellers are eager to get an offer under contract, they may be more likely to negotiate, suggests another investor Insider profiled in June.
“Six months ago, the stuff I was buying was first-day listings, and I was using cash because it was all about speed,” veteran California-based investor Michael Zuber told Insider.
“If it gets out to 15 days, sellers are getting nervous. They’re thinking, ‘Nobody’s showing up at my open house,’ and they might be open to a lower offer,” Zuber elaborated. “Every market is slowing down, just at different rates and different speeds.”
While trying to time the market can be a fool’s errand, paying close attention to the changing housing stats and watching recent sale prices can give one a better understanding of which markets are softening and by how much. However, one can expect that the power to negotiate could be moving away from sellers and towards buyers’ favor for the foreseeable future, Zuber suggests.
“Because I think this market downturn is going to take a few years, I will make sure every deal I do is better than the one before,” he said. “I don’t know where the bottom is.