Concerns over a potential housing bubble have been brewing for a while. The last two years marked unparalleled growth in home values, where the median home price rose by an incredible 36% from March 2020 to March 2022. This was on top of the 10-year bull market for real estate, where the average annualized bump in home values was roughly 12% per year -- three times the historical average. Growth at this rate isn't sustainable.
And it seems the housing market could be reaching a breaking point. With more homebuyers getting pushed out of the market due to high prices, rising mortgage rates, or getting outbid in bidding wars, the market is shifting.
Spring sales activity is down, ushering in what many are calling the Great Deceleration of the housing market. Here's why experts are saying a new era for home prices is finally here and what the Great Deceleration could mean for the housing market.
Image source: Getty Images.
The Great Housing Market Deceleration explained
The term "the Great Deceleration" was originally coined by Fortune to illustrate the steady slowdown of the housing market after a tremendous run in home values and demand. February through April 2022 have seen consistent month-over-month declines in existing home sales. According to the National Association of Realtors (NAR), April sales were down 5.9% from last year and down 2.4% from the previous month.
May data hasn't been fully released yet, but the data that has been published is showing much of the same: A growing amount of inventory is hitting the market, yet fewer sales are taking place. Clearly, this reflects a deceleration in the housing market.
What the Great Deceleration means for the housing market
While things are cooling, it's important for homeowners and potential buyers to understand how this plays out in the market in real time. A housing market correction doesn't happen overnight, like a stock market correction or crash does. It happens slowly, over time, taking several months or even years for inventory levels to be reflected in sales prices.
This lag time in the greater market is precisely why the median sales price has continued to rise through May, despite all indicators showing the market is shifting toward deceleration. Prices should start to reflect the higher cost of borrowing due to rising mortgage rates and inflation, as well as a steady increase in inventory -- eventually flattening.
As inventory increases, homebuyers will have more options, making it a less competitive market. Offers over asking and bidding wars may still happen in hot markets but likely not at the same rate as before. Homeowners may receive fewer offers than they would have just a few months ago and may need to adjust expectations for how quickly the home will sell or what selling price they'll get.
What to expect in the coming months
The Great Housing Market Deceleration is less of a correction and more of a return to normalized levels of home activity. For the remainder of 2022 and possibly a few years beyond, small but consistent reductions in home sale activity should be expected. An economic recession, which many believe is looming, would certainly increase the speed at which the housing market decelerates and could push it into a full-blown correction. For now, the rate of deceleration is minimal.
Considering selling? You may want to take advantage of record home prices now before things shift. Prospective buyers could benefit from waiting, but with rising mortgage rates, compare the cost of a loan at today's lower interest rate versus a lower sales price a few months from now but with a potentially higher interest rate. Often, a lower interest rate will lead to higher savings than a lower purchase price, especially since the rate of deceleration is so slow right now.
