The housing market is showing various signs of a cooldown. And that's something income property owners need to be aware of.
In June, signed contracts to purchase existing homes fell 20% on an annual basis, according to the National Association of Realtors (NAR). That represents the slowest sales pace since September of 2011, with the exception of the first two months of the COVID-19 outbreak (which, let's face it, we can't really count since much of the country was on lockdown at that point).
On a monthly basis, pending home sales fell 8.6%, compared to May. That's a far more substantial drop than housing-market experts were anticipating.
Not surprisingly, a decline in pending home sales has come at a time when mortgage rates are on the rise. In mid-June, the average 30-year mortgage rate crossed the 6% threshold before dropping back down later on in the month. But borrowing rates were significantly higher last month, compared to June of 2021.
Should income property owners be worried?
A big decline in pending home sales doesn't automatically mean that buyer demand is waning drastically. Let's remember that the real estate market has sorely lacked inventory for months on end. When there aren't many homes available to buy, the number of contracts buyers are entering into is apt to drop.
But it's also important that real estate investors with income properties see the big picture -- that higher borrowing rates have the potential to lead to a strong degree of buyer pullback, and that that may already be happening. As such, investors who have been thinking of selling an income property may want to act quickly, before home values start to fall and more buyers are priced out of the market due to rising borrowing rates.
Will home sales continue to decline?
The NAR predicts that total home sales for the year will drop 13%, compared to 2021. However, it also anticipates an uptick in home sales in early 2023.
Ultimately, mortgage rates will play a big role in total home sale numbers. Earlier this week, the Federal Reserve implemented a 0.75% interest-rate hike for the second month in a row. Mortgage rates didn't respond to that change overnight, but in the coming weeks and months, they could rise sharply from their already elevated levels.
Given the potential for much higher borrowing costs and sky-high home prices, it won't be surprising to see more buyers back away from the market this year. Investors who want to sell off income properties shouldn't hesitate to get their listings ready. Waiting could spell the difference between snagging an unbelievable profit, versus one that's just average.
It's also worth noting that home sales are tumbling at a faster rate in some markets than others. In the West, sales dropped almost 31% from June of 2021. Investors in that neck of the woods may want to act especially quickly, before they lose out on the chance to walk away with offers they're happy with.