In the early days of the pandemic, it became clear that something strange was happening in the housing market. To keep the economy going, the Federal Reserve cut the federal funds rate to a historic low, and buyers came in droves to take advantage of the lower mortgage rates that were partly the result of this measure. All of these buyers competing for a limited number of homes on the market drove prices into the stratosphere.
While we knew enough to expect a correction, we couldn’t have known when it would happen. It’s taken years, but recently we’ve seen signs of a softening market and greater potential for buyers to regain some level of control. Home sellers should prepare for a slowly normalizing market in many parts of the country.
Two realities
What makes the situation so difficult is the fact that we are faced with two competing realities.
- The Federal Reserve Bank of St. Louis reports that the median home price this summer is $412,300. However, according to the National Association of Home Builders (NAHB), 49 percent of households do not make enough money to afford a $250,000 home, let alone one that sells for more than $400,000.
- The number of homes on the market in the U.S. has increased. As homes stay on the market longer, competition has decreased.
So here we are: Homes remain prohibitively expensive for a large portion of the American population, but fewer and fewer people are competing to buy a home (which is good news for buyers).
Impact of reduced competition on buyers and sellers
While at the height of the pandemic, homes were selling out within hours of going on the market, by early summer the situation had changed. Nearly 70% of U.S. counties surveyed saw an increase in inventory over the past year.
Between May 2023 and May 2024, 16% more homes were for sale. While this is still less than in May 2019 (before the pandemic), it is still an improvement.
Because there is less competition for homes, properties stay on the market longer. The longer a home is on the market, the greater the chance that a seller will be forced to accept sale contingencies.
In times of high competition, homebuyers are more likely to forgo contingencies. For example, if they fear another buyer might beat them to the punch, they may forego a home inspection to make their offer more attractive.
When competition dwindles, sellers eager to move on may have no choice but to agree to the buyer’s terms – a scenario homebuyers haven’t seen in years.
What about real estate prices?
As mentioned, home prices are still out of reach for millions of potential buyers, but that could change. Lawrence Yun, chief economist for the National Association of Realtors (NAR), recently told NBC News, “Inventory has certainly increased, but sales have not really taken off yet. So if inventory levels persist for a longer period of time, we will actually see price reductions.”
We may not be able to predict when a new mortgage will become more affordable, but based on the history of home sales in the U.S., we know the following factors are at play. When each factor comes into play, we can expect the market to soften.
inventory
Home prices have risen dramatically during the pandemic, in part due to low supply. As more properties come on the market, sellers looking to exit must compromise on everything from price to contingencies.
Interest charges
Nothing drives inflation like a global pandemic, and to cool it down, the Federal Reserve raised interest rates. With inflation currently below 3%, the Fed is looking to cut interest rates again. This will likely impact mortgage rates as well, and potential home sellers who have been looking to move may be willing to do so. With their properties being put up for sale, we can expect prices to drop.
Other available properties
Another way more homes could flood the market is through government intervention. For example, the Biden-Harris administration recently announced funding for communities to build more affordable homes. The goal is to lower housing costs by giving buyers more homes to choose from.
According to the U.S. Department of Housing and Urban Development (HUD), $100 million in competitive grants are currently available to help developers reduce red tape, build more housing, and lower the cost of renting and purchasing.
There’s no getting around the fact that the market remains challenging for many homebuyers, but Lawrence Yun told NBC News he sees hope for the future.
As supply increases across the country, homeowners are less tied to the homes they currently own. More homes on the market means more opportunities for buyers to find a home they can afford and regain control over purchase offers.
