The U.S. housing market is entering a period of intense uncertainty, and many economic indicators suggest that turbulence lies ahead.
As the Federal Reserve raises interest rates to combat inflation, the housing market has cooled, and Americans have grown uneasy, according to a market overview by Clever Real Estate. Google Trends data shows that searches for “real estate market crash 2022” hit 100% popularity in January and February.
Although the stock market has entered a bear market, meaning it’s down 20% from its peak, most experts agree that the housing market won’t crash as it did in 2008. However, it’s likely headed for a slight correction, providing some relief for Americans looking to buy a home.
Don't Assume Home Values Will Drop
Home prices skyrocketed during the pandemic, rising 36% from March 2020 to March 2022. Even before the pandemic, homes were more expensive, proportional to income, than they were in previous decades.
Since 1970, inflation has increased 644%, but home prices have climbed 1,608%, according to a study from Anytime Estimate. If home prices had risen at the same rate as inflation, the median home price in 2022 would be $177,788 instead of $408,000.
Many Americans, especially would-be home buyers who have been priced out of the market, would welcome a market correction. However, there's no guarantee that a correction will come.
As the Federal Reserve raises interest rates, mortgage applications have fallen, causing some sellers to postpone listing their home. In some markets, sellers have cut their price, but average home values haven’t yet declined.
Get Your Finances in Order
When mortgage rates rise, lenders tighten their standards and extend fewer loans. That makes it even harder for borrowers to get approved for a mortgage.
For borrowers, improving their credit score can help them qualify for a better interest rate, which can translate into tens or hundreds of thousands in savings over the life of a loan. There are several proven strategies to improve a credit score, including paying off collection accounts, making payments on time, and limiting hard credit inquiries.
Buyers entering a competitive market should also work on reducing their debt, especially expensive, high-interest debt such as credit cards. While reducing their debt, they should also increase their savings for a down payment. A large down payment — 20% or more — reassures lenders because buyers have a considerable stake in the home from day one.
If You’re Selling, Consider Delaying
The fall and winter seasons are usually tough times to sell a house. Inclement weather makes open houses impractical in many areas of the country, and the holidays absorb the attention of most Americans.
This winter could be even slower than usual. The Federal Reserve’s interest rate hikes have depressed demand by sidelining potential buyers. In June 2022, mortgage demand had already fallen to half of what it was a year before, according to data from the Mortgage Bankers Association.
With fewer buyers, listing now could result in seller’s remorse, especially if multiple price cuts are needed to attract buyers.
Consider Waiting for Interest Rates to Fall
Mortgage rates are elevated, but they likely won’t stay that way forever.
Raising interest rates is the Federal Reserve’s attempt at taming inflation. If and when inflation declines, interest rates may follow. Buyers who wait out this inflationary moment could be rewarded with much more favorable mortgage terms.
No one knows how long it will take for interest rates to decrease, but a recent survey of economists by Bloomberg found that the most common prediction is that the Federal Reserve will cut interest rates around late 2023.
Maintain a Historical Perspective
Interest rates plunged during the pandemic as the Federal Reserve stabilized the economy by purchasing billions of dollars worth of mortgage bonds and treasuries.
By the end of 2020, mortgage rates had hit a low of 2.7%. Today’s interest rate hovers around 7%.
The uproar around increasing interest rates misses one historical fact: Just a handful of years ago, today’s rate would have been considered fairly normal.
In late 2018, the 30-year fixed-rate mortgage rate was about 4.6%, just slightly lower than today's rate.
Cash Is Still King
Historically, home sellers have always had a strong preference for cash offers because they don’t come with the uncertainty of a mortgage approval process. This preference has helped fuel the rise of cash buyers.
In a slower market, cash buyers have even more leverage than usual, and today’s market is no exception. The percentage of purchases by cash buyers accounted for a quarter of all U.S. home sales as of April 2022.
As mortgage rates climb, banks approve fewer loans, and buyers who do get approved may have diminished purchasing power. If homes linger on the market for weeks or months, sellers will be eager to make a deal.
As a result, the market may be in the early stages of a long-term structural shift from a seller’s market to a buyer’s market — specifically a cash buyer’s market.
Polish Your Resume
If the slowdown in the housing market causes a full-blown recession, job cuts could soon follow. In 2008, the last time the economy went into recession, the U.S. lost 2.6 million jobs.
Buyers' employment status has a major impact on their mortgage approval process, and pre-approval can be invalidated if there’s a change in employment.
However, losing a job doesn’t mean that a home purchase is out of the question. Buyers who plan on taking advantage of the slow autumn market should update their resume so if they’re laid off, they can quickly find another position. A small gap in employment can be excused or overlooked by a lender, but a long one can make the loan process tough.