It’s been over two years since housing values started climbing. After a minor drop at the start of the pandemic, house prices began to shoot upwards, hitting record highs. Despite fears that this would not last for more than a few months, house prices are still going up, even with mortgage rates now higher than before the pandemic.
There is a significant sense that the housing market is cooling off, however. This may have something to do with our expectations – a cool-off seems inevitable and that may prejudice us. But the evidence does point to this being a reality.
What is making people believe that the housing market is cooling off? For those investing in real estate, evidence may make or break a decision. Let’s take a look at the factors pointing to the housing market cooling off.
A lower incline
The main reason that it is impossible to say as of yet whether the market is cooling is that housing prices are still going up. Throughout the US, prices have continued to rise during 2022. However, the steepness of that incline has dropped.
Until the end of 2021, housing values were shooting up. Their rise was almost alarming because it was almost certainly unsustainable. Had the incline then looked like it does now, people may have seen less cause for concern. But now that the incline is less steep, the contrast with what we have seen until now is stark.
This is no guarantee that the market is cooling off, but it is an indicator which could itself have an impact. As potential buyers see the incline getting ever more gentle, they will start to fear that it will become a decline. As such, they may decide to hold off on buying property, leading to a drop in demand and a subsequent drop in prices.
Construction is down
Perhaps a more significant indicator that the market is cooling is the evidence that construction is down (or soon will be). Fewer permits have been issued for new construction of residential buildings. The evidence points to a decline in demand that is already present. Investors are not risking starting construction on new residents, as they do not have the confidence that their investment will be worth it.
This could, of course, have the opposite effect. Property values are all about supply and demand. By holding off on building new properties, a lack of supply may cause values to go up as buyers rush to get their hands on what they can. The problem is that there are many factors that may prevent people from buying homes even if they want to, and so demand may drop far more than supply does.
The affordable housing crisis
There is another factor that is somewhat more ominous when looking at whether the housing market is cooling down. The affordable housing crisis was in the news before the pandemic hit, and it is now an ever-present topic. This contrasts with the view of the housing market that shows that high demand is driving prices up.
The reality seems to be that many properties are being bought by investors rather than individuals. These investors either intend to sell the properties at a higher value or rent them out. This practice is certainly not new, and there is technically nothing wrong with it.
However, the more unaffordable housing becomes for the average American, the more likely it is that investors will face an uncomfortable truth – their properties won’t be as lucrative as they expected. Properties may end up standing empty if their owners are not willing to charge less for rent.
Investors who begin to see little hope in making the money they anticipated might begin selling off their properties. With new investors aware of the high risk in buying property in a market that may be cooling, supply may rise with a significant drop in demand.
It is this kind of evidence that provides the biggest indicator that a correction is on the way. A strong economy in which a huge proportion of individuals are struggling to put food on the table indicates that national wealth is only a mirage. In the same way, a strong housing market in a country where no one seems able to afford housing indicates that demand is not really so high.
We have no guarantee that the market won’t continue to rise. However, indications are that the market is cooling off. While this does not mean a crash is imminent, it does look more likely than ever.