The Housing Market Is Slowing Down, But Buying a Home Isn’t Getting Easier. Here’s Why

A photo to accompany a story about the housing market slowing down David Paul Morris/Bloomberg via Getty Images
Contractors work on a home under construction in Antioch, California, on June 14, 2022. The number of home sellers lowering prices has reached the highest level since October 2019, the latest sign that the housing market is slowing from its once-frenzied pandemic pace.
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Frustrated homebuyers may have hoped during the scalding hot housing market of the past two years for there to please, pretty please, be less competition.

They’ve gotten their wish. It doesn’t mean those homes on the market are any easier to afford. In fact, that part has gotten worse.

“We’re starting to see more homes available for sale. That should eventually shift things back into buyers’ favor,” says Danielle Hale, chief economist at Realtor.com. But, she adds, “we haven’t seen a lot of evidence of it yet.”

National data show what would seem at first glance to be conflicting trends: Home sales are down while home prices are up. Sales of existing homes in June were down 5.4% from May and 14.2% from a year prior, according to data from the National Association of Realtors (NAR). The same report found the median sales price for an existing home was $416,000 — a record high and an increase of 13.4% from a year prior. According to the mortgage data and technology firm Black Knight, the rate at which prices are growing dropped by almost two percentage points in June, the biggest single-month slowdown since the early 1970s.

From annual price growth of nearly 15%, “slowing” could mean price growth of 5%, says Jacob Channel, senior economist at LendingTree. 

“People who are expecting home prices to suddenly start plummeting or to come down are probably in for a rude awakening,” Channel says.

Here’s what that slowdown means for homebuyers.

How the Housing Market Is Slowing Down

To understand how the market is slowing down, it’s first important to understand why it was so hot in the first place. Research by Freddie Mac, a government-sponsored entity that buys mortgages on the secondary market, pointed to four key factors

  1. Record-low mortgage rates in 2020 and 2021;
  2. Limited supply from underbuilding;
  3. An increase in first-time homebuyers because of age demographics; and
  4. Migration from high-cost cities to areas that already had a housing shortage. 

Those record mortgage rates are gone, replaced by the highest rates since 2008, but issues with the supply of homes remain, as do demographic shifts in terms of age and location.

Rising mortgage rates and the affordability issues they bring to an environment with high prices are the key factors behind the slowdown, Hale says. “We’re seeing fewer sales happen,” she says. “That’s generally because buyers are grappling with higher costs today from higher mortgage rates and higher home prices. They’re just less able or willing to find a home that’s in the right price range.”

The big issue at the moment is that while demand may soften, supply isn’t improving fast enough to make a big difference. “The reason why this particular housing market is somewhat unique is that it’s not only that there’s such strong demand that created the spike in prices but there is less supply than there needed to be,” says Isabel Barrow, director of financial planning at Edelman Financial Engines, a national financial planning firm.

That’s particularly the case in the hottest markets. In Atlanta, the inventory of available homes at the end of May was enough to last about 1.2 months, says Karen Hatcher, CEO of Sovereign Realty and Management and president of the Atlanta REALTORS Association. A healthy inventory is closer to four to six months.

“That’s not enough to move the needle on prices because of demand,” she says. “At 1.2 you’re still in a sellers market.”

Current Mortgage Rates Are Making Things Worse

If you’re trying to buy a house and you don’t have cash – such as from selling your old home – you’re going to have to get a mortgage. And that’s where the biggest change in expenses for today’s homebuyers is coming from. At the start of the year, the average interest rate on a 30-year fixed-rate mortgage was about 3.3%. In June, it was closer to 6%. That’s a huge jump in a short period of time, and it means it’s harder for folks to qualify for a loan, and higher payments for those who do.

“When rates were at record lows, people often could afford more expensive homes because the low rates offset the increase in asking price,” Channel says. “However, as rates continue to rise, because a higher rate means your monthly payment is going to be more expensive, you’re going to find yourself with much less wiggle room.”

There isn’t much comfort to find in high home prices; you don’t really have much of a choice there. With mortgage rates there is at least a chance of solace in the future, even if you buy now. That’s because you have the opportunity to refinance a loan in the future to get a better interest rate if those rates come down, which might happen.

Experts also point out that, if you look back more than a few years, a 6% mortgage rate isn’t all that bad. Rates of 7% were seen as pretty good back in the 2000s, Barrow says. “Everyone is really sensitive right now to these interest rate increases and watching them closely,” she says. “Historically speaking, we are still on the lower end of the interest rate environment.”

The Homebuying Experience Is Changing

High prices and mortgage rates are pushing a lot of buyers out of the market, which can present opportunities for those who are staying in. Depending on the market – even the neighborhood – buyers might even have time to take it a little easier now, compared to the chaotic rush of the past two years.

“They’re likely experiencing a market that’s still relatively competitive,” Hale says. “The data suggest that homes that are priced well still sell quickly, in part because shoppers in today’s market are still expecting mortgage rates to go up.”

Experts say the less-competitive market doesn’t mean it’s not competitive at all, and it depends on your buying strategy and timeline. Hale says those with some flexibility are able to put in offers on more homes over time, potentially snagging one for below list price. Those who are in a rush to move, however, are still facing headwinds. 

It also means some of the buyer behaviors we’ve seen lately might fade just a bit. Things like waiving an inspection or appraisal might not be as necessary if buyers are competing with fewer bids. “That doesn’t mean things are suddenly going to become super easy for buyers,” Channel says.

How to Navigate the Changing Housing Market

The slowdown means fewer shoppers to compete with, but the reason for that is that homes are less affordable, which might change how you can approach your homebuying process.

Be Financially Ready to Buy

Getting ready to buy a home is more complicated than pulling up listings and figuring out whether you like the location of this one more than the deck on that one. It starts with determining if you’re in the right financial position to buy, and how much you can afford. 

Barrow suggests your first steps should be ensuring you have an emergency fund before you start thinking about how much house you can afford, and that you give yourself some cushion in your homebuying budget for things like unexpected maintenance. Then focus on clearing up your credit score, paying down credit cards or paying off other debts to get the best interest rate possible. “Especially in an environment where the economy is not quite as sure-footed as it felt like it was maybe a year ago, it’s really important to look at that affordability first,” she says.

Getting preapproved for a mortgage is essential, as is shopping around for that loan. When you do so, Hale suggests asking your lender what happens if mortgage rates move even higher. Then resist the temptation to go over what you plan to spend. “Really pin down how much you want to spend on housing and stick to that budget,” she says.

Think Smaller

People like to think of their homes as their castles, but especially when a house is tough to afford, resist the temptation to go for the full palace when you’ve got a bungalow budget. The home you find might not be perfect, but it might be something you can improve over time, as your finances allow.

“It’s OK to purchase homes and then make your upgrades over time,” Hatcher says. “It may not have everything you want but it might have everything you need.”

Pro Tip

Consider your financial situation before jumping into the housing market. Don’t sacrifice your other financial goals just to buy a house now. 

Find Help

You don’t have to go it alone on this home search, and you might not have to go it alone on paying for that down payment either. You may live in a state or city with a down payment assistance program that can help cover some of those upfront costs, making it easier to afford the home you want. Those eligibility requirements might even be more accommodating than you think, Hatcher says.

“If they qualify for down payment assistance, they should use those funds and get familiar with it,” she says. If you opt for one of those programs, be sure you have a lender who’s familiar with them. An experienced lender can save you money while also getting you to the closing table quickly.

What About Adjustable-Rate Loans?

Buyers trying to find ways to afford homes these days might be tempted by alternative loan products, like adjustable-rate mortgages (ARM loans), that offer lower initial interest rates for a few years, with variable rates afterward that could go up or down with the market. Experts say buyers should be aware of the risk of those loans – unlike a fixed-rate mortgage, your payment might change significantly if rates keep going higher. “Don’t rush into the housing market right now and get a riskier type of loan that just becomes more burdensome over time,” Channel says.

Barrow recommends buyers focus on 30-year fixed rate loans. “Once you get into that 30-year loan, you don’t have inflation on any of it,” she says. “That means it’s going to feel a lot less expensive in five years or 10 years or 20 years.”

There’s Always Renting

Do the math to see what kind of home you can afford in this market, and if it doesn’t work out, don’t rush into a bad financial decision for fear of missing out, experts say. 

“If the choice is between renting something or going way over budget to buy a house you can barely afford, renting is going to be the much better option,” Channel says.