What most of us have been anticipating is finally here. Home sales are slowing down after months of strong housing demand and price hikes.
Things are slowing down a bit in real estate as a housing slowdown is occurring over the past few weeks. Sleepy towns where housing prices were pushed up due to the displacement of remote workers are seeing drops in home prices as of late.
According to Fed chair Jerome Powell, activity in the 2022 US housing market is showing signs of weakness.
The National Association of Realtors confirms the housing slowdown as pending home sales and deals dropped by 8.6% in June from the previous month. It was beyond the experts’ prediction and a huge 20% drop from a year ago.
According to CNBC, the housing slowdown is the slowest since September 2011, with the exception of the first two months of the pandemic.
Let’s find out what they mean to you as a real estate investor.
Activity in the Housing Sector Slowing Down
While the pandemic’s onset was bad for almost every industry, including the real estate sector, the market has since recovered. Over the past couple of years, we’ve seen low home prices and even historically low mortgage rates.
Mortgage rates recorded an average of 3.11% in 2020, with December 2020 registering the lowest at 2.68%. And although mortgage rates had gone up since then, it has remained relatively within reach for the most part of 2021 until Q1 2022.
Along with the rapid increase in mortgage rates, home prices have also gone on a constant upward trend over the past year. Strong demand for housing has pushed prices upward, leading a few analysts to think that a housing market crash is upon us.
However, the housing slowdown is no indicator of a crashing market. It simply means that the long overdue cooling down is finally here. If you think about it, what’s happening now is quite ironic, yet logical. The strong demand for housing drove home prices and mortgage rates up.
Now that housing is becoming too expensive for the regular Joe to afford, there is less demand for home ownership. More people are resorting to renting, dragging down home sales significantly.
This shift in buying behavior has caused a lot of home sellers to lower their asking prices to make a sale. In July 2022, 20% of builders reduced their prices on new homes.
Out-of-state locations that attracted buyers at the height of the pandemic are cooling off the fastest. Even mortgage applications are at their lowest since February 2000. That being said, experts predict that the downward trend in both demand and prices will continue as our battle against inflation goes on.
Fed Raises Rates by Another 0.75%
In an effort to rein in inflation, the Federal Reserve recently announced another 0.75 percentage point rate increase. It is part of its campaign of aggressive interest rate hikes while acknowledging a softening economy.
The Fed’s continuing strategy of tightening monetary policies is its way of combating inflation and bringing it down. The Federal Open Market Committee also increased its target to the 2.25% to 2.50% range for short-term interest rates. The increase is the highest since 2019 and the fourth rate hike in 2022.
Fed officials also expressed that we could expect more rate hikes to take place over the next few months. Consequently, it will continue to affect home sales in almost all markets.
What This Means for Real Estate Investors
As a real estate investor, the rate hike can mean several things to you.
One, housing – or better yet, home ownership – demand is declining because of high housing prices and increasing mortgage rates. It means that buying an investment property is within your reach.
Home sellers, especially from towns that experienced a housing boom in the pandemic, are lowering their prices now. Even if interest rates are above 5% today (5.75% on a 30-year fixed-rate mortgage), the lower housing rates are still attractive enough for investors.
The cooling down in home sales is something you can give careful consideration to as an investor. Depending on the location, now might be a good time to take advantage of decreasing home sales as prices go down and inventory goes up.
Two, while it is a good time to buy now as home sales decline, it might not be ideal to sell. Keep in mind that a lot of sellers are lowering their prices because sales are going down. It applies to the housing market in general.
Three, as a real estate investor, you can buy a home from a good housing market and convert it into a rental property. Since most people are resigned to renting for now, it is a good time to start a rental property business.
As a landlord, you can set higher rental rates as you see fit. However, if you want to keep your vacancy rate to a minimum, we recommend you set reasonable rental rates. Unreasonably high rates will only turn off potential renters, no matter how attractive your rental property is.
How to Find Affordable Investment Properties
If you’re an investor looking for affordable rental properties to buy, we recommend starting with real estate website Mashvisor. The online platform maintains a database of almost all real estate markets across all 50 states. Its database is regularly updated and uses reliable sources such as Airbnb, Zillow, and Realtor.com and for its data.
Founded in 2014, Mashvisor helps countless investors find the best investment properties that fit their needs. Thanks to tools like the property finder and investment calculator, lots of rental property investors are able to make wise investment decisions.
To learn more about how you can use Mashvisor to find profitable investment properties, schedule a demo today.
Wrapping It Up
As home sales go down, expect the housing market to cool down as well. As the Fed continues to fight inflation, percentage point rate hikes will continue to keep consumer demand from going up. It consequently affects buying decisions as higher interest rates make it harder to own a home.
It creates two scenarios where housing demand goes down but so do home prices. As home prices fall, sales climb. However, only time will tell when buyers start taking advantage of low prices, which can potentially increase demand for homeownership again.
As a real estate investor, you need to know when to take advantage of the situation. It also helps if you use a website like Mashvisor for your rental property analysis to calculate the profitability of an investment.
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