Is the Housing Market Cooling Off?
The housing market has been on an upward trajectory in recent years. However, rising interest rates, slowing sales, and slower home price rises indicate a cooling market. Mortgage rates reached their highest level last year, eclipsing 7 percent for the first time in 20 years amid the U.S. Federal Reserve's ongoing battle with inflation. Rate hikes have made homes less accessible, slowing demand.
The cooling off of the US housing market has led some experts to speculate about the possibility of a housing bubble. While there are no clear signs of a bubble at the moment, the rapid rise in home prices over the past few years has raised concerns about a potential correction in the market. The deceleration in home price growth and slowing sales may be early indications that the market is heading toward a more sustainable level, but it remains to be seen whether these trends will continue or if the market will experience a more significant correction.
A housing bubble usually begins with a boost in housing demand while inventory is limited, which can cause housing prices to spike. That bubble can burst when demand falls or stagnates even while supply increases because of the earlier jump in demand. This can spur a sharp decrease in home prices when the new supply of homes lacks buyers willing or able to pay the higher costs.
There is no clarity regarding the housing market forecast for 2023. Most analysts predict that home prices will grow in the majority of the housing markets next year albeit slightly. If inflation persists, the Fed could tighten more than anticipated by the financial markets. This would result in higher mortgage rates, which will impact the U.S. housing market. If inflation falls or a recession develops in the near future, the Fed may soften financial conditions.
While it remains unclear if the U.S. housing market will crash, consumer confidence in the market increased 0.6 points in November to 57.3, its first increase in nine months, though it remains just above the all-time low set last month and significantly lower than its level at this time last year, according to Fannie Mae's Home Purchase Sentiment Index (HPSI).
16% of respondents indicated that now is a good time to buy a home – unchanged from the previous month – while the percentage who believe now is a good time to sell a home increased from 51% to 54%. Year over year, the full index is down 17.4 points. Both consumer homebuying and house-selling sentiments are much lower than they were last year, which is predictable given that mortgage rates have more than quadrupled and home prices remain high.
According to a recent report from Redfin, a technology-powered real estate brokerage, expensive housing markets in the U.S. are cooling down amid rising mortgage rates, inflation, a slowing stock market, and general economic uncertainty. The company analyzed the 100 most populous metropolitan areas based on how quickly they cooled from February to August based on year-over-year changes in prices, price drops, supply, pending sales, sale-to-list ratio, and share of homes that went off the market in two weeks.
Some of the fastest-cooling cooling areas include both those that have long been expensive and places that became significantly less affordable during the pandemic because they attracted scores of relocating homebuyers. According to Redfin’s report, Seattle’s housing market is cooling off faster than any other in the country. The good news is that the slowdown is dampening competition and giving those who can still afford to buy more negotiating power
Homebuyer demand and competition are down in Washington state city. About 34% fewer homes sold within two weeks in August than a year earlier. Home prices are also falling, with the typical property selling for 2% less in August than a month earlier. These stats indicate that Seattle buyers have more to choose from, and homes are taking longer to sell. Tacoma is also among the top 10 markets cooling fastest.
Las Vegas, Nevada scored second on the list, with home values falling 3% in August from the previous month and around 26% fewer homes selling within two weeks than a year before. Third place goes to San Jose, CA, where the housing market has likely cooled since the Fed's rate hikes and rising mortgage rates have made it more difficult to buy a property there.
Top 10 Cities Where Housing Markets Are Cooling the Fastest
- Seattle, WA
- Las Vegas, NV
- San Jose, CA
- San Diego, CA
- Sacramento, CA and Denver, CO (tie)
- Phoenix, AZ
- Oakland, CA
- North Port, FL
- Tacoma, WA
Top 10 Housing Markets Cooling Off The Most
Buyers of new homes are growing increasingly wary. Rising mortgage rates and declining home sales have heralded the end of a hot housing market that has afflicted buyers for more than a year. According to the Census Bureau, home sales have decreased by over 18% since January 2022. Some locations, though, have cooled faster than others.
SmartAsset examined the 100 largest metro areas, 92 of which had complete data, to determine where housing markets are cooling the most. They compared locations using eight metrics divided into two categories: price reduction and decreased demand. Here are the key findings of the report.
- California metro areas are cooling off the most.
- Three California metro areas rank in the top 10 for our study.
- In these areas, homes are staying on the market longer relative to a year ago – nearly double the amount of time.
- Moreover, all three areas have seen over a 33% decrease in the number of houses sold monthly from August 2021 to August 2022.
- The share of listings with price cuts is up 10% from a year ago.
- Nationally, about 16% of home listings had a price cut in August 2021.
- Comparatively, that figure is now almost 26%.
- Homes are on the market for less than 10 days in 36 metro areas.
- Last year, 67 metro areas fell into that category.
- Nationally, the average time on the market for a home listing currently stands at 13 days.
1. Boise, ID
The housing market in Boise, Idaho is cooling off the most relative to all other metro areas in our study. Boise has the sixth-lowest ratio of the number of sold houses to new listings (0.49), meaning that almost twice as many houses are being listed relative to the ones that are sold. The median days a house sits on the market is 20, and this figure is almost 186% higher than one year previously.
2. Austin-Round Rock-Georgetown, TX
The fourth-largest metro area in Texas has experienced a chill in its housing market with the fourth-largest decrease in demand and the 13th-largest price reductions. Across specific metrics, Austin-Round Rock-Georgetown has the second-highest median days on the market for home lists (27 days) and the fourth-worst ratio of houses sold to new listings (0.49).
3. Phoenix-Mesa-Chandler, AZ
Phoenix-Mesa-Chandler, Arizona ranks No. 3 overall. The metro area has the fifth-highest percentage of house listings with a price cut (39.61%), which is 25% points higher than a year ago. Additionally, the number of houses sold in a month has declined by more than 41% between August 2021 and August 2022.
4. San Jose-Sunnyvale-Santa Clara, CA
San Jose-Sunnyvale-Santa Clara, California ranks in the top 10 for both larger price reductions and lower demand. Houses are on the market for roughly 19 days (eighth-highest), which is a 90% increase since exactly one year ago (18th-highest). There has also been a 43.17% decrease in the number of houses sold and 26.81% of current listings have a price cut.
5. Las Vegas-Henderson-Paradise, NV
Across all 92 metro areas we considered, Las Vegas-Henderson-Paradise, Nevada ranks worst for our decreased demand category. Over the past year, the number of houses sold monthly has fallen by about 44%. And as a result, Las Vegas-Henderson-Paradise has the third-lowest ratio of the number of sold houses to new listings (0.48), meaning that almost twice as many houses are being listed relative to ones that are sold.
6. Salt Lake City, UT
Salt Lake City, Utah has the eighth-largest decrease in demand and 16th-largest price reductions. Specifically, this area takes spots in the top 10 across five metrics including the percentage of listings with a price cut (41.89%) and the one-year change in the number of houses sold monthly (down 41.88%).
7. North Port-Sarasota-Bradenton, FL
Home prices in North Port-Sarasota-Bradenton, Florida are experiencing significant reductions. As of August 2022, over 31% of house listings have a price cut and the average price cut as a percentage of the home value is almost 6%. Relative to one year previously, this is a 17% increase in the percentage of homes with a price cut.
8. San Diego-Chula Vista-Carlsbad, CA
The San Diego-Chula Vista-Carlsbad, California metro area takes a top 15 spot across three metrics: the one-year change in houses sold (35.53% decrease), the one-year change in the median amount of time that a house is on the market (two times higher) and the percentage point difference between the share of listings with a price cut over one year (17.78%).
9. Provo-Orem, UT
Price reductions on homes in Provo-Orem, Utah have been widespread. The metro area has the second-highest share of listings with a price cut (45.58%) and the largest increase in this figure relative to one year prior (26.26%). In terms of demand, there was a 57.38% decrease in houses sold in the area from August 2021 to August 2022 and there were nearly double the new listings compared to houses sold in August 2022.
10. Stockton, CA
Rounding out the top 10 is Stockton, California, which eighth-longer an average number of days on the market for home listings (19 days) and the 10th-highest one-year change in the percentage of listings with a price cut (33.85%). As of August 2022, over a third of home listings in the area experience a price cut.