It’s no secret that the real estate market has been on an upswing in recent years. With average home listing prices now nearing half a million dollars, it’s becoming increasingly difficult for buyers to afford the higher prices and mortgage rates. Despite lower demand, home prices are still rising, leaving buyers to choose between purchasing a smaller or less expensive residence or waiting for the market to shift.
The real estate market has been slowing down lately, with sales volumes dropping and inventory increasing. This is affecting the bottom line for many in the industry, while buyers are left wondering why prices remain so high despite a decrease in demand.
As the market shifts, it is important to understand why the real estate market is slowing down and what factors are driving this change. This article will explore the economic, supply and demand dynamics, and market sentiment at play in determining why buyers are facing a slower market. Let’s take a look at why the real estate market is slowing down.
#1. Economic Factors
Economic factors are one of the primary drivers of a slowdown in the real estate market. Here are the key reasons why:
The Shift in Interest Rates and Mortgage Rates
The rising interest rates and mortgage rates make it more expensive for buyers to borrow money to purchase a home. Not only does this increase the total cost of the loan, but it also affects the buyer’s ability to qualify for a loan, as lenders have stricter lending standards in times of higher rates. As a result, buyers are finding it more difficult to purchase their dream home a reality.
Rising mortgage rates also mean prospective buyers have to spend more money each month on their mortgage payments. This is difficult for those already struggling to make ends meet and puts an extra burden on those trying to buy their first home.
Impact of Inflation on Housing Affordability
While inflation has declined for 11 months straight as of May 2023, it’s still higher than what economists and Federal Reserve officials believe is ideal. This has had a number of impacts on housing affordability:
- Higher mortgage rates: As inflation rises, so does the cost of borrowing money, making it more expensive for buyers to purchase a home.
- Decreased purchasing power: Inflation has led to decreased purchasing power, meaning buyers have less money to put toward their housing purchases.
- Stagnant wages: Wage growth has not kept up with the rate of inflation, which means that buyers are less able to afford a home than before.
- Rising home prices: As demand for homes increases due to population growth and other factors, so do home prices. This leaves buyers in a difficult position as they must either pay more or wait for the market to slow down.
Job Market Fluctuations and Their Influence on Home Buying Decisions
Over the last few months, the job market has seen its fair share of fluctuations, with many sectors seeing significant layoffs and hiring freezes. This has had a major impact on home buying decisions, as those laid off may have to wait longer to purchase a home due to their financial uncertainty.
Furthermore, those still employed may be hesitant to commit to a large purchase, such as a home, due to the current economic climate. As a result, job market fluctuations have significantly affected the real estate market, as buyers are more hesitant to commit to buying a home due to their uncertain financial future.
#2. Supply and Demand Dynamics
The real estate housing market is heavily influenced by supply and demand dynamics. When supply is higher than demand, prices tend to fall as buyers have more options available. On the other hand, when demand exceeds supply, prices tend to rise as buyers compete for limited housing inventory.
Understanding these dynamics can help you determine whether it’s a good time to buy or if you should wait until the market slows down. Now, let’s dive into how supply and demand are causing the market to slow down.
Oversupply of Housing Inventory in Certain Regions
Approximately 57 housing markets saw their inventory skyrocketing by more than 200% in 2022. These include:
- Idaho Falls (387% uptick)
- Ogden (372% uptick)
- Provo, Utah (371% uptick)
- Coeur d’Alene, Idaho (365% uptick)
- Salt Lake City (up 355%)
Despite the oversupply in certain regions and buyers having more options, the demand has surprisingly been low. Many potential buyers are holding off on purchases due to the uncertainty of their job security and financial situation. This lack of demand has caused prices to stagnate, making it difficult for sellers to find buyers for their homes.
Decreased Demand Due to Demographic Shifts
According to recent statistics, the US population has grown older, with the median age rising from 35.2 in 2000 to 38.8 in 2020. As the population ages, the general demand for homes is decreasing as people are less likely to buy a new home or move. This lack of demand from younger buyers has caused the real estate market to cool down.
Additionally, many older individuals are choosing to age in place rather than move into a different home. This has further decreased the demand for homes as those individuals are not looking to buy or sell their current housing. As a result of these demographic shifts, the real estate market is slowing down.
Finally, younger generations are increasingly pursuing rental options due to their preference for mobility and convenience. As more people choose to rent instead of buy, the demand for housing decreases. The shift in preference has affected the real estate market, making it difficult for sellers to find buyers.
Effects of COVID-19 on Housing Preferences and Buyer Behavior
The COVID-19 pandemic has had a major effect on the real estate market in multiple ways. Here are some of the effects it has had on housing preferences and buyer behavior:
- More buyers have been opting for larger homes with more amenities, such as outdoor space, home offices, and extra storage.
- Businesses have been relocating to remote areas, leading to an influx of buyers in certain regions.
- Many potential buyers have been holding off on purchases due to economic uncertainty caused by the pandemic.
- Remote work has made it easier for people to move further away from cities and urban centers without sacrificing their job or lifestyle.
These changes in buyer behavior have led to a decrease in demand and a slowing down of the real estate market, as sellers have difficulty finding willing buyers as previously.
Rising Construction Costs Leading to Limited New Developments
The construction cost has also been rising, making it difficult for developers to create new housing developments. The price of lumber used to build the average single-family home has nearly tripled, increasing to more than $18,600. Other materials like gypsum and steel have also seen major price hikes, further increasing development costs.
These high construction costs have also made it difficult for developers to compete with existing housing prices, as they cannot produce homes at the same price points. As a result, many developers have been forced to delay or cease new developments, limiting new housing options for buyers and further slowing down the real estate market.
#3. Market Sentiment and Buyer Psychology
Market sentiment and buyer psychology are important in the real estate market. Buyers often rely on their emotions when making a decision, which can be influenced by external factors such as current economic conditions or press coverage. A lack of confidence in the market can lead to buyers holding off on purchases, resulting in lower demand.
These are some of the specific ways that market sentiment and buyer psychology are impacting the real estate market:
Perception of Overvaluation in Certain Markets
When it comes to overvaluation, California is usually the first place that comes to mind. But other markets like Seattle, Washington, and “Zoom towns” such as Boise, Idaho and Greeley, Colorado are also facing an issue with house prices being more expensive than they should be. These overvalued markets have caused many potential buyers to hesitate before making a purchase.
The issue of overvaluation is not only impacting buyers but sellers as well. With buyers being hesitant to purchase, it can be difficult for sellers to find willing buyers at a fair price, leading to their properties sitting on the market for longer than expected, ultimately causing them to lose money in the long run.
To combat this issue, buyers and sellers need to be educated on market conditions and the current pricing environment. Buyers should research local markets and understand a fair price for their desired property, while sellers should stay up-to-date with the latest trends to price their homes accurately. This knowledge will help buyers purchase at a fair price, and sellers can receive a fair return on their investment.
Emotional Impact of Previous Market Downturns
Any market downturns in the past can have a lasting emotional impact on potential buyers and sellers. For buyers, these memories may lead to hesitation when investing, as they fear prices may plummet again. From 1991 and 2001 to 2007, the real estate market has seen its share of dips, causing buyers to be more cautious and conservative in their approach.
Although it’s more than a decade since the last market crash, it has emotionally impacted potential buyers and sellers. This hesitation has resulted in fewer people buying or selling homes, slowing the real estate market and potentially leading to further declines.
Influence of Media Coverage and Market Speculation on Buyer Confidence
The media has had a huge influence on buyer confidence in the real estate market. Many buyers rely on news outlets and online sources to get information, which can be full of speculation and rumors about the market. This has led to buyers feeling uncertain and hesitant about making a purchase, which slows down the entire process.
Here is how:
- Rumors of an impending housing market crash can cause buyers to delay their purchases out of fear of prices dropping further.
- Negative reports on rising mortgage rates or higher home prices can also discourage buyers from purchasing.
- When the media sensationalizes stories of foreclosures or defaults, it can make buyers question the stability of the market.
- Reports of increased inventory and fewer sales can lead buyers to believe they have more negotiating power than they actually do.
Navigating the Real Estate Market Slowdown
It is clear that the real estate market is in a state of flux due to a variety of economic, supply and demand dynamics, and market sentiment factors. Interest rates, mortgage rates, inflation, job markets, oversupply of housing inventory in some areas, demographic shifts, construction costs, and media coverage are all playing a role in influencing the slowdown of the real estate market.
The complexities of the real estate market can be daunting, but it is important to stay informed and adapt to changing conditions. Buyers should take advantage of the current market dynamics by doing their research on available properties and being mindful of potential risks.
Ultimately, staying informed about the current market dynamics and making decisions that are right for you is key to navigating a slower real estate market. By taking these steps now, you’ll be well-positioned to benefit from any future recovery.