Is the red hot real estate market starting to cool? Does a drop in pending home sales spell trouble ahead for the real estate market?

You may have seen headlines like these recently as reports were released showing that pending home sales declined in August. While sensational, the headlines don’t mean anything unless some context is provided. Luckily, that’s exactly what I’m going to do for you in this months’ real estate market update.

Continue reading below, or click play on the video below, to learn what the drop in pending home sales means and what the experts believe home prices are going to do in 2022.

Pending Home Sales

The pending home sales report got a lot of attention in the media over the last couple of weeks as it’s the first piece of news to come out suggesting the red-hot real estate market might be cooling a little.

If you’ve seen any of my other blog posts, or videos, from the past few weeks you’ll recall a cooling, or shift is something I’ve been talking about for a while now. Needless to say, there are many that have jumped on this information as evidence that a housing crash must be right around the corner. With that in mind, I wanted to dive into the pending home sales report a little deeper and provide some context.

The following graph shows the number of pending home sales, month over month, going back to 2012.

The recent decline in pending home sales, shown by the red arrow on the far right side of the graph, is what the recent report is talking about. Notice that following the lockdowns last year, pending home sales skyrocketed to an all-time high, before starting to come back down as we moved into 2021. We did see a bump in pending home sales in late spring and early summer, before falling again recently.

Even though pending home sales fell, notice that we are still well above what is considered a healthy level of sales activity as demonstrated by the dotted white line.

Why have pending home sales generally been falling throughout 2021? Simple, you can’t sell what isn’t available! The underlying theme of the real estate market for the past year has been a lack of inventory. The imbalance between supply and demand is what has fueled the rapid price increases, multiple offers, and bidding wars.

Ask anyone who has been shopping for a home recently and you’ll continually hear that conditions remain very difficult. Although there has been lots of talk of a housing bubble and crash, the truth is we are still very much in a sellers’ market. Although there are signs conditions are starting to improve, nobody should be expecting a major change in the near future.

Odeta Kushi, Deputy Chief Economist at First American recent said;

And as I mentioned above, the imbalance between supply and demand has been the main driver of the market conditions we have been experiencing. The pandemic, along with record-low mortgage rates, caused buyer demand to increase as many realized their current living conditions were not ideal to the “new normal” while sellers have remained in hiding.

This shows the traditional monthly listing inventory, nationwide, going back to 2017;

2017, 2018, and 2019, represented by the white, blue, and gray lines shows that new listing inventory traditionally increases each month before peaking in May before declining each month thereafter until the end of the year.

The orange line represents 2020, which started much like the previous 3 years, until March…. Although new listings did come on the market once the lockdowns were lifted, the total number of new listings never reached prior-year levels for any of the remaining months of the year contributing to the inventory shortage we were already experiencing due to a lack of new construction over the past decade.

Here is how new listings in 2021 have compared;

Although 2021 has more closely followed the trend lines we saw in 2017-2019, with the exception of new listings peaking in June/July, you can see the total number of new listings is still well behind what we experienced in previous years only adding to the shortage of listings needed to bring balance back into the market.

If you, or anyone you know, has been considering selling, here are 4 reasons why this fall might be the perfect time.

So is the Market Cooling?

With all I’ve just pointed out, it’s hard to see how the market is showing any signs of cooling. While there do continue to be signs of a shift in the market it doesn’t mean buyers are suddenly going to find all sorts of deals and be able to submit offers well below the list price. The cooling is more like the first hint of a breeze on a blazing hot summer day.

While the number of new listings had been increasing, we did see a slight decline in new listings in August. That isn’t uncommon as August is not typically an ideal time to put your home on the market. There are those end of summer vacations, getting ready for school, school actually starting, youth sports on the weekends starting again etc. Even though new listings declined slightly, inventory remained steady at right around a 1 month supply, still very tight, but better than the 0.5 months we had earlier in the summer.

We are also starting to see improvements in the list-to-sales price ratio. In June and July homes were selling for an average of 107% of the list price. For example, a home listed for $500,000 would sell for $535,000 on average.

In August, that percentage improved to 104%. Nothing to get too excited about, but still an improvement. Going forward, I expect we will continue to see improvement along with fewer bidding as not every home will receive multiple offers.

If you've been thinking about buying and you're sitting on the sidelines hoping prices will decrease in 2022 it doesn't look as though that's going to happen.

Here is what has just been released regarding home price appreciation in 2022;

These forecasts are for the national market. Here in Frisco and Prosper we have been running well above the national average all year and I don’t expect that to change in 2022, but I do expect the pace of appreciation will ease from what we saw this year.

Bottom Line

Although I don’t expect we will see any major changes in the months ahead, I do believe that conditions for buyers will improve as more inventory comes to market both from new construction and resale homes.

If you have any specific questions or want to know if now is the right time for you to consider buying or selling, please schedule a call and I’d be happy to talk through your specific situation.