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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:
- The economy.
- Housing supply and demand.
- Mortgage rates.
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.
Days on the market
Days on the market (DOM) refers to the number of days a house is on the market before selling. The faster a home sells, the hotter the market. The longer homes take to sell in the market, the slower the market. Currently, Realtor.com states that the median days on the market for the nation as of March 2020 is 60 days, so markets will want to match or beat that median DOM.
Home prices also affect whether a market is moving or slowing. If home prices increase too quickly, outpacing wage growth, it could result in lower demand because buyers cannot afford to buy a home.
While low housing prices promote more people to buy, it's not always directly correlated. Many times when the price of real estate is low, the economy is in a recession, which normally means a lower number of buyers in general. Markets should ideally follow the national average appreciation rate, which is typically around 3% to 4%.
Increased number of price reductions
One final but prominent sign a real estate market is slowing is an increase in price reductions by sellers. When a market is beginning to slow, the number of price reductions will continue to grow in an effort to sell the homes. This often follows longer days on the market but can be a sure sign of a slowdown in and of itself.
How a slow housing market impacts buyers
A slow housing market is typically a good thing when it comes to buying real estate because it means sellers are more motivated to sell. Buyers can often negotiate a lower price for the home or request special terms as a part of the contract, like seller concessions.
How a slow housing market impacts sellers
If you are a seller in a slow housing market, it's important that you be flexible and patient and have a realistic understanding of the current market conditions. You may need to offer incentives to buyers to motivate them to choose your home over others, or perhaps reduce the price.
While a slow market is not an ideal time to sell, it does not mean you have to lose your shirt. If the current market doesn't support the price you want or need to get from selling your home, possibly wait it out until it becomes a more balanced or favorable market.
The bottom line
Real estate markets operate differently from city to city and state to state. That's why Dayton, Ohio, can be booming while a small rural town just an hour away may be slowing. If your market is showing signs of slowing, prepare accordingly and remember that markets operate in cycles. While it may not recover to what it once was, most markets will turn around in the future.
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