Real Estate Investing

‘Buyer fatigue’ may be cooling down the U.S. housing market

The historic combination of factors that produced soaring U.S. home prices and a hyper-competitive real estate landscape during the coronavirus pandemic will become a case study for the ages in the years to come.

Homeowners who managed to sell at a significant markup may have seen their fortunes dramatically change for the better, making good on past investments beyond their wildest dreams.

Others who resolved to eat the record prices in order to get settled in a home — including many young Millennial families — will take comfort in the incredibly low interest rates they received and will hope that their properties continue to appreciate in value.

For months, stunned housing market analysts have wondered when the inevitable cooldown would arrive and what would likely precipitate it. Higher interest rates? More inventory? Seasonal adjustments that help normalize the market?

While there has been no major cooldown to speak of yet, there are now some signs that it’s happening in noticeable ways. And one of those signs seems to be buyers who are punting on their search for a home until the situation becomes more favorable.

“Mortgage applications have dropped to an 18-month low, and we are seeing some real buyer fatigue in the market,” Tamar Asken, a real estate agent at Avenue 8 in Los Angeles, told Forbes this month. “Sellers are responding to lower buyer enthusiasm with price reductions.”

Over the past several months, housing inventory has slowly but surely climbed and reduced some of the pressure on prospective buyers who have had to haphazardly leap at opportunities in their desired markets, sometimes throwing caution to the wind.

But other economic factors also appear to be impacting the outlook for the housing market next year. High inflation in the U.S. has raised expectations that the Federal Reserve will increase interest rates sooner than later, further dampening the scramble for homes that are priced especially high. If mortgage rates were to rise from around 3.09% currently to the 4% range next year, they’ll still be low compared to past periods, but this will have a typical slowing effect on home prices.

Predictions are a tricky business to enter when it comes to real estate, especially during times of profound societal change such as we have seen during the pandemic. At the outset of the crisis last year, CoreLogic and Zillow both predicted that home prices would fall through the end of 2020. The opposite turned out to be true, setting the stage for a 2021 that appears on track for a 15-year high in U.S. home sales.

The concept of “buyer fatigue” is very real, but it likely speaks more to a wait-and-see approach informed by rational evaluation than it does disillusionment with the goal of homeownership. Many would-be buyers simply want to act more on their own terms than respond to pushy, blink-and-you’ll-miss-it chances.  

The irony is that too much fatigue and waiting may end up leading to another competitive surge when these buyers watching from the sideline decide in large numbers that they’re ready to pounce on homes.

The conditions for a more normal market to return are likely on the horizon, if for no other reason than that time has passed from the catalyst of the pandemic and the economy has changed. The question will be how much these emerging cooldown conditions coincide, how big of an effect they have and how quickly that effect materializes in ways that change the status quo of open floodgates we’ve seen during the pandemic.

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