After a year of rock bottom rates, soaring demand, and bidding wars, the housing market is starting to slow down. In June, Redfin reported that 60,000 home purchase agreements fell through, which is the highest number of cancellations the U.S. has seen since the beginning of the pandemic.
This is partly because many buyers are facing housing affordability challenges — Zillow found that monthly mortgages are up 75% from 2019. High home prices coupled with higher interest rates have priced many potential buyers out of the market.
“The housing market isn’t crashing, but it is experiencing a hangover as it comes down from an unsustainable high,” said Taylor Marr, deputy chief economist at Redfin. Let’s look at why the housing market is slowing down and how buyers can navigate the changing market.
Why the housing market is starting to slow
The biggest problem homebuyers are dealing with right now is rising interest rates. As of July 28, rates for a 30-year mortgage are 5.3%, which is up from 2.8% just a year earlier. Many experts forecast that mortgage rates will range from 5% to 7% by the end of 2022.
And even though interest rates continue to rise and home sales have slowed, home prices remain at an all-time high. In June, the median home price was $416,000, up more than 13% from a year earlier.
Home prices have risen exceptionally high in cities that experienced a high level of migration during the pandemic. For instance, you can expect to pay more for a home in Austin and Phoenix.
With inflation at an all-time high and fears of a pending recession, many homebuyers are becoming more budget conscious. That means more and more buyers will be stepping out of the market.
How buyers can navigate the housing market
The housing market is starting to slow down, but it’s still relatively competitive. Aggressively priced homes are still selling fairly quickly since many expect rates to rise even higher in the coming months.
If you’re hoping to buy a home in 2022, here are a few steps you can take to navigate the changing market:
- Make sure you’re financially prepared: The first step is to ensure you’re financially prepared to buy a home. Make sure you improve your credit score as much as possible, so you qualify for the best rates and loan terms. You should also try to save up a three to six month emergency fund to deal with any financial challenges that may arise.
- Look for down payment assistance programs: Depending on where you live, your state may offer a down payment assistance program. These types of programs can reduce some of the upfront costs of buying a home.
- Don’t max out your budget: Finally, don’t buy a house that’s at the top of your budget. Take a look at your finances and determine what you can realistically afford to pay each month. Just because the bank approves you for a certain mortgage limit doesn’t mean you can afford it, and you can save yourself from a significant headache by taking a proactive approach to buying your home.