5 Signs the Housing Market is Cooling + 5 Signs It's Not

Many components influence how hot or cold a housing market is. Individual signs can be misleading without looking at the combination of factors together. Here are five reasons the market could be cooling and five signs it's not.

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While there are, overall, still fewer homes for sale than historic pre-pandemic levels, the supply is slowly making its way back to meeting demand. There was a 6.7% improvement from March to April in regards to the number of homes available to meet buyer demand, according to Realtor.com.

When the market slows, supply rebalances with demand, which seems to be the trend we are now seeing.

Inflation in goods and services, rising mortgage rates, and stagnant wages have taken many would-be homebuyers out of the game. On top of the already limited supply of entry-level housing, recent home price growth has exacerbated the affordable housing crisis, with home affordability at its lowest point in the last three years.

This could cause the market to cool as the pool of prospective buyers dwindles due to affordability.

Mortgage rates are increasing today almost as quickly as the housing market grew these past few years, putting tremendous pressure on buyers. Between rising interest rates and an all-time high median sales price, the cost to finance a home has increased nearly 50% from just last year. That means higher monthly payments and more debt to pay off, both negative pressures on a seller's market.

ALSO READ: Current Mortgage Rates: Still Competitive Today

More houses had to lower their listing prices this month than at the same time last year. It could be that the sellers are reaching for the stars or that demand is truly cooling. Either way, something is clearly giving.

Of 50 major metros, 40 saw an increase in price reductions, up significantly from last month, which only saw 25 major metros with increasing price reductions.

April saw a decrease of 9.5% in pending home sales year over year, while inventory is slowly catching up, so it's not likely related to a shortage of available homes. Although it is still well above pre-pandemic levels, this significant decrease could signify that the housing market is finally starting to slow down from its recent breakneck speeds.

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This past month saw a consistent and continual increase in median list price to a record national high of $425,000 in April. The median price per square foot is up 15.1% year over year, even faster growth than in March. Buyers seem ready to pay whatever price is necessary as they try to lock in as low an interest rate as possible.

In June 2021, the shortest average days on the market to date was 36 days. April 2022 beat that record, with an average of just 34 days on the market. Some major metro cities saw even faster sales, with certain cities as low as 28 days on market. If the market were slowing, the days on the market would be increasing, but that's clearly not the case right now.

New homes for sale or rent have yet to catch up to demand. It's not a matter of finding the place that is just right for you but rather finding anything you can to put a roof over your head at a price you can afford.

Builders are behind for numerous reasons, and continual supply chain disruptions mean it's not getting any easier to complete a build. When there is a long-term supply issue like this, it will keep demand high for the foreseeable future.

ALSO READ: Housing Inventory is Extremely Low. Will More Homes Hit in 2022?

Rents have risen almost as quickly as home prices, with many markets seeing rental growth exceed home price growth. In April 2022, rents grew 16.3% year over year, on average, for the nation.

For renters who have enough money for a down payment, buying a home -- even at today's high prices -- can make more financial sense over the long term because you can secure a fixed monthly payment rather than deal with rising rents for years to come.

This creates long-term demand for housing until renting becomes more affordable.

Inflation is a reality, not just during high-inflation times like we are currently experiencing but also throughout history. The cost to buy a home in 1980 was more expensive than buying a similar home in 1950.

The inflation rate may slow or speed up, but the upward trend is consistent. That means home prices aren't likely to change dramatically even if the overall market conditions change. Rising home prices are a reality of our economic world.

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Many buyers are crossing their fingers for a market correction, while others are taking advantage of what they still believe is a great buy. With so many conflicting factors, it is hard to say whether the market is ready to plummet or we are only partway to the moon.

There are valid factors for both sides of the argument, and only time will tell where it goes. Rather than waiting the real estate market out, make the best buying or selling decision for your current circumstances.

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