3 signs that American homebuyers are solving the housing crisis by refusing to pay crazy prices

Millennial homebuyers attend open house
Prospective buyers visit an open house in West Hempstead, New York.

  • After months of surging prices, Americans seem to have had enough with the housing boom.
  • With inventory near record lows and prices climbing at the fastest rate ever, buyers aren’t biting.
  • There are many signals that buyers are cooling the market on their own, by saying no.
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One question is plaguing prospective homebuyers in this red-hot housing market: when will prices start coming down? But the cure for high prices is high prices, to paraphrase a famous saying from the commodities world.

There’s evidence that buyers are providing the cure, staying away from the high prices and cooling the market by collective action – or inaction.

Here are the three signs that American buyers are slowing the housing market’s roll on their own.

(1) Sales down from their peak

The start of the pandemic – and unprecedented easing from the Federal Reserve – sparked the housing boom. Sales of new and previously owned homes still sit well above pre-pandemic levels, but both have slowed from their fall peaks.

The decline is powered, in part, by the massive shortage of homes across the US. With fewer homes to sell, the sales rate can’t remain at elevated levels.

Still, the steady decline suggests the market boom could be normalizing. It also comes as median selling prices for new and existing homes sit at record highs, presenting an affordability problem for buyers just entering the market.

(2) Buyer optimism waning

The wave of demand that powered the housing boom seems to be crashing.

More than half of surveyed Americans referenced high home prices when evaluating the market, according to the University of Michigan’s survey of consumer sentiment. The reading marks the biggest share ever recorded by the survey.

More broadly, 54% of respondents said it was a bad time to buy homes in May. That’s the most pessimistic outlook since 1982.

Anecdotal evidence supports the data. Eighty-two percent of millennials said in May they’re more likely to buy a fixer-upper due to affordability issues, according to a Bank of America survey. The generation is particularly vulnerable to the price melt-up. Millennials are nearing their peak homebuying age and already had their finances dented by the Great Recession. Unless price growth cools, the generation could be forced to cheaper alternatives to homeownership.

(3) Mortgage interest sinks

It’s not all bad for prospective homebuyers, however. Mortgage rates have only just risen from the record lows seen earlier in the year, offsetting some pressures from soaring prices.

Home loan data suggest the trade-off just isn’t appealing enough for buyers. The Mortgage Bankers Association’s Purchase Index – a gauge of mortgage applications for single-family homes – has tumbled nearly 27% from its January peak.

Forecasts suggest the downtrend is part of a larger correction. Mortgage applications surged through the second half of 2020, possibly reflecting a pulling-forward of demand as borrowing costs tumbled. But loan purchases have fallen below their projected trend through much of 2021, Len Kiefer, deputy chief economist at Freddie Mac, said in a Wednesday tweet.

To be sure, housing data is volatile, and recent readings suggest the buying surge will continue. Pending home sales soared 8% in May, according to a Wednesday report, trouncing the estimate for a 1% decline.

The long-term expectation, however, is for a widespread slowdown, Ian Shepherdson, chief economist at Pantheon Macroeconomics, said.

“The surge in pending home sales is a huge outlier,” he said. “We still think sales will fall a bit further over the next few months, pushing up the months’ supply numbers and taking some of the heat from surge in prices.”

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