Over the past decade, high demand, low inventory, and inexpensive interest rates have aided price growth and a hot real estate market. But are there signs of a slow housing market?
Learn what it means to have a slowdown in real estate and how it impacts homebuyers and sellers.
What creates a hot or cold real estate market?
All markets operate in cycles, including real estate. The real estate market often mimics economic conditions and is directly impacted by things such as:
When the economy is doing well, real estate is actively bought and sold because people have more money to buy. Unemployment rates are typically low and consumers have confidence in continued economic growth and expansion, which promotes price growth.
When the economy is in a recession, real estate sales volume decreases. Unemployment rates usually increase, and borrowing and spending tightens. This creates less demand for housing and often pushes real estate prices down.
Housing supply and demand
Housing supply and demand directly impact housing prices. When demand is high but there is a housing shortage, it's considered a seller's market because there are more buyers than there are homes for sale. This drives up the price of real estate, often bringing about bidding wars on homes until a more balanced supply and demand ratio is reached.
If a real estate market has an excess of homes for sale compared to the number of buyers, it's considered a buyer's market. An abundance of inventory but a lack of buyers is the perfect equation for sellers to reduce prices.
Attractive mortgage rates make a big difference in housing demand and the climate of the real estate market. When mortgage rates are low, borrowers are more likely to take out a mortgage because their buying power increases.
For example, if a borrower qualified for a $1,000 mortgage payment, they could afford a home priced at $233,000 (putting $46,000, or 20%, down) if interest rates were 5 percent. If mortgage rates were 4 percent, the same borrower could now afford a home priced at $262,000, assuming they had the additional funds to put $52,400, or 20%, down. Decreased mortgage rates give homebuyers more purchasing power, and as a result, home prices usually increase because of demand.
This is one of the many reasons the Federal Reserve (the Fed) often lowers the federal rate to promote banks to lower interest rates for mortgages in the wake of a recession, to promote people to buy homes again.
Signs of the housing market slowing
Real estate agents and real estate professionals typically use the following indicators to determine where the real estate market stands and/or to identify whether there are signs of the market slowing:
- Home inventory supply.
- Days on market.
- Home prices.
- Increased number of price reductions.
Home inventory supply
Realtors use inventory levels to determine how a market is performing. To calculate this, take the total number of available homes for sale in the current month divided by the average number of homes selling in that same month. So if your market has 1,200 homes for sale and 200 homes sell on average per month, you would have a 6-month supply.
In a balanced real estate market, there should be around a six-month supply of homes. When inventory supply exceeds six months, it typically means the market is starting to slow because there are more homes than there are buyers.