Introduction
In recent years, there has been an increase in the housing market. But recently, there has been a notable cooling in the market. The market experiences a decrease in housing transactions, a slowdown in price appreciation, and a decline in qualified buyers, leading to a more balanced and less frantic real estate environment. Fewer people can afford to buy or rent property due to the price increase. Thus, it is crucial to carefully examine inventory shortages and declining sales as the primary factors contributing to the slowdown in the housing market.
Causes of Declining Trends in the Housing Market
The primary factor behind the slowdown in the housing market is an inventory shortage. The price surge was primarily attributed to the scarcity of inventory resulting from the pandemic. The demand for housing experienced a notable increase due to a more significant proportion of individuals engaging in remote work (Bade & Parkin, 2020). However, the need for more available housing, particularly in desirable areas, posed a significant challenge. As a result, house prices have hiked, inducing the cooling off of the housing industry.
The second leading cause of the housing market cooling off is reduced sales. Inflation-driven price increases, declining stock values, and stable but high mortgage rates contributed to fewer Americans purchasing homes in 2022 than in 2022 (Bade & Parkin, 2020). From April to May, pre-owned home sales decreased by 3.4%. According to NAR, they decreased by 8.6 percent compared to May 2021. According to the U.S. Census Bureau, the sale of newly built homes is reportedly down 6% annually (Hansen, 2022). Reduced sales create a ripple effect, causing sellers to become more hesitant and further contributing to the cooling off of the housing market.
Third, the fall in mortgage applications is a significant contributor to the cooling off of the housing market. As record-high inflation lingers and recession fears deepen, the Federal Reserve has considerably raised its benchmark interest rate this year to curb economic growth. Banks typically increase interest rates for consumer borrowing when the Federal Reserve tightens its grip on the economy by boosting the cost of bank borrowing from one another by increasing rates from 3% to over 6% (Hansen, 2022). With mortgage rates rising in the preceding six months, many prospective buyers have been priced out of the market.
Fourth, buyers’ backing out of deals is a leading effect of the housing market’s cooling off. Redfin data shows that over 60,000 property purchase agreements fell through in June, indicating the highest monthly failure rate since the epidemic began, accounting for 15% of all homes under contract that month (Hansen, 2022). This reduces vendor and market confidence and increases the number of contract cancellations. The increase in deal cancellations also contributes to the cooling off of the housing market.
The final cause of the cooling off of the housing market is the slashing of prices by sellers. To stay in business, sellers lower prices, forcing more would-be buyers away. Every week preceding July 3, they witnessed a price decrease for 7% of the homes offered for sale, according to data gathered by Redfin (Hansen, 2022). If sellers notice indications of a sluggish market, they can be more willing to barter and offer discounts. Price reductions can further impact market sentiment, potentially leading to a cycle of price adjustments that contribute to the overall cooling off of the housing market.
Conclusion
In summary, the housing market is cooling off due to inventory shortage, reduced sales, falling mortgage applications, backed-out deals by buyers, and sellers slashing prices. Following these, the mentioned facets, market activity, and consumer confidence have decreased. Rising inflation and mortgage rates, which have made it more difficult for first-time buyers to enter the market, are to blame for the decline in demand. As sellers become concerned, the cycle of price reductions and raises causes the market to slow down.
References
Bade, R., & Parkin, M. (2020). Foundations of economics. United States: Pearson.
Hansen, S. (2022). 5 signs the housing market is finally cooling down. Money. Web.