It has finally happened!!

Rather than just seeing signs of a cooling housing market, the market is now cooling, rapidly.

It shouldn’t really come as a surprise. In fact, it’s something many people, including myself, have been hoping for.

The question now is how cool is it going to get?

Continue reading below, or watch the following video, for some insights and perspective on where the housing market is heading.

Stories about an imminent housing crash seem to be everywhere, don’t they?

It seems as though everyone has an opinion, but in all honesty, nobody knows for sure exactly what the next year holds.

What I do know is all the different stories, reports, and videos floating around seem to do more to confuse than to clarify. Just this morning I’ve seen two different YouTube videos forecasting a crash while news reports from CNBC and First American were discussing why a cooling housing market doesn’t mean a crash is imminent.

Rather than try and guess, although it would be an educated guess after nearly 20 years, I’ll follow the data!

Cooling is a Good Thing

I think we can all agree on the fact the red-hot housing market of the past couple of years was unsustainable. The multiple offers, bidding wars, waitlists at new construction communities, and rapidly rising home prices couldn’t continue.

However, many news reports come across as if it’s some sort of surprise that pending home sales are falling, mortgage applications are falling, and there are fewer new home starts. It’s important to keep in mind that these numbers are all falling from record highs that we all agree were unsustainable.

Where do we go From Here?

Another important fact to keep in mind is unless you are an investor, the vast majority of homes are bought and sold based on life events, not current market conditions.

Getting married, getting divorced, having a baby, kids moving out, job relocation, retirement, etc. are the events that drive real estate transactions, and that is unlikely to change. While the timing can sometimes be impacted by affordability, if the babies coming, the babies coming.

The historically low-interest rates that helped fuel the market over the past couple of years spoiled us to a certain extent. Now, instead of first-time home buyers opting for the 4 bedroom, 3,000 sqft home with a game and media room, they might have to look at the 3 bedroom, 2 bath that will work for the next several years before then moving again using the equity they have built. (Yes, I still believe equity will be built over the coming years)

Rising mortgage rates and home prices won’t stop the market, but it will slow it, especially considering the alternative, renting, which isn’t getting any cheaper. Over the past few weeks, we have received numerous calls from renters who now want to buy because they are finding lease renewal is coming with a $400 to $800 per month increase!

Some Perspective

In its last policy meeting, the Federal Reserve openly discussed its desire to slow the housing market down in an effort to bring balance back into the market. This is easier said than done, however as there are numerous different factors at play.

Home prices have been rising rapidly due to the imbalance between supply and demand. Ultra-low mortgage rates fueled demand but we didn’t have enough supply to satisfy that demand. Now, rising mortgage rates are slowing demand, but ironically also hurting supply. If you currently own a home and have a 3% mortgage rate there would have to be a compelling reason for you to sell and buy a new home with a 6% mortgage rate. On top of that, inflation is driving the cost of building materials for new homes higher, while rent increases show no signs of slowing down.

How the next 12 to 18 months play out will largely depend upon where you live. The housing market in San Diego won’t be impacted the same as the housing market in Boise, Phoenix, Miami, or here in Frisco.

One of the best ways to keep up to date on local market conditions is with our Weekly Market Report.

Here is a screenshot of conditions here in Frisco, TX for the week of June 20th;

The first section to call your attention to is the Market Action Index. The MAI is like a speedometer that shows you at a quick glance how market conditions are.

A reading over 30 indicates market conditions favor sellers. While the current reading of 88 is lower than the 96 reading from last month, and the 100 reading from the month before, you can see that we are still well above the 30 reading that would indicate more balanced conditions.

In the Market Profile on the right-hand side, you can see the number of homes receiving a price reduction before going under contract is up to 28%. While this is substantially higher than the 4% at the beginning of the year, it is still below the 35% we see in a normal market.

Lastly for this photo, notice Median Rent continues to climb and is now at $3,095 per month. As long as the cost to rent is comparable with the cost to buy, you won’t see home prices decline.

In order for us to see more balance in the market we will need to not only see demand soften, but supply to increase.

While inventory has been increasing rapidly since the beginning of March, the 300 active property listings is still 65% fewer than we had on the market in June 2019.

Although everything is trending in the right direction, we still have a way to go before we achieve balance in our local market.

Click Here to view the Frisco Market Report I reference above and from that report you can search any city or zip code in the country and even subscribe to receive weekly updates via email.

Bottom Line

Although housing market conditions are improving, we are still seeing bidding wars and multiple offers here in our Frisco and Prosper markets. Granted, not every house is subject to a bidding war anymore, we are seeing fewer offers per house, and sales prices are generally closer to the list price assuming the home wasn’t listed way below market value to begin with.

For new homes, most builders have now cleared their waitlists and are starting to offer incentives to buy down mortgage rates, help with closing costs, etc.

If you have additional questions about new construction opportunities, the market in general, or a specific situation you would like to discuss in more detail, please give us a call at 469-296-5230 or email Contact@S2RealEstateTeam.com