4 Signs That the Whitehot Housing Market Is Beginning To Cool

A completely unscientific list of the hottest things on Earth goes something like this:

1. Lava
2. The first bite of a Pizza Roll
3. The 2022 US Housing Market
4. A midsummer barbeque in Death Valley

Despite how it feels when it’s burning you, everything on this list cools eventually – and the housing market is no exception.

In just the first three months of the year, the 2022 housing market broke records for bidding wars, low inventory, home appreciation, and more. But with spring underway, there are signs that fast-rising mortgage rates are starting to cool a seemingly un-coolable market.

As Redfin deputy chief economist Taylor Marr put it, we’re seeing the market slowly change course.

“I think of the 2022 housing market like a ship slowly changing course, rather than something that will come to an abrupt stop. The ship is still facing north, but some flags can be seen waving in the periphery, telling us that a cooldown is taking shape.”

Here are some of those flags Marr was talking about.

Cooling on the coasts

Coastal metros such as Los Angeles, San Francisco, Seattle, and Boston are among the most expensive housing markets in the US. Now, with mortgage rates in the 4’s and 5’s, fewer homebuyers can afford to buy in these markets, which is causing the market to cool.

According to Marr, this is evident in four ways:

1. Google searches for “home for sale” are down 7.9% nationwide, but falling 13%-15% in Boston, San Francisco, and Los Angeles
2. Home tours in California are down 22% from the beginning of the year. In the same time period last year, they rose 76%
3. Requests for service from Redfin agents are up nationwide, but down in pricey coastal markets
4. Mortgage applications are down in many coastal markets, lead by an 18% year-over-year decrease in Los Angeles and Orange County

Like the Pizza Roll mentioned above, the molten-hot edges of the country are cooling first – but they’ve still got a long way to go before the market is palatable again.

Mortgage applications are down from last year

According to the Mortgage Bankers Association (MBA), mortgage applications were down 1.3% from the previous week to the week ending on April 8.

Much of that is due to refinance activity, which was down 62% from the same period last year. But purchase applications were also down 6% from the previous year.

MBA Senior Vice President and Chief Economist Mike Fratantoni pointed to rising mortgage rates and inflation-combating measures by the Fed as a cause for declining mortgage activity. Although the number of sales may drop, he’s expecting record purchase volume in 2022 due to higher home prices.

“The jump in mortgage rates will slow the housing market and further reduce refinance demand the rest of this year,” Fratantoni said. “Higher home prices and rates as well as ongoing supply constraints are now expected to lead to an annual decline in existing home sales. However, MBA continues to expect purchase originations to reach a new record in 2022. Even though existing sales volume will be slightly lower than last year, the continued growth in new home sales and the swift rise in home prices should deliver a smaller, but solid, 4 percent annual growth in purchase origination volume.”

This is a prime example of how homebuyers will still feel the burn even as the market begins to cool.

Related reading: 2022 Mortgage Rate Forecast: Housing Authorities Weigh in

Price drops are on the rise

One measure of how hot the market is is the share of homes that feature price drops. When there is sufficient demand, sellers are typically able to sell their homes at or above list price. Price drops can signal weakening demand or sellers getting a little too big for their britches, or both.

In a welcome sign for homebuyers, Redfin data shows the share of homes for sale with price drops has been increasing since March and has surpassed the share for this period in 2020 and 2021.

In the four-week period ending April 3, 3% of homes for sale featured a price drop. At this time last year, less than 2.5% of homes had price drops.

Is this a game changer for most homebuyers? No, but it’s an early signal that sellers are ceding some power.

Second-home sales are plummeting

Earlier in the pandemic when mortgages were cheap and remote work was novel, demand for second homes (aka vacation homes) sales skyrocketed. Now, with mortgage rates and home prices much higher, that demand is falling back to pre-pandemic levels, according to data from Redfin.

Prices and mortgage rates aren’t only to blame. On April 1, a new fee on high-balance and second-home loans backed by Fannie Mae and Freddie Mac took effect, adding thousands of dollars to the cost of these mortgages.

Upfront fees for high-balance loans increased 0.25 to 0.75 percentage points. For second homes, fees increased between 1.125 percent and 4.125 points based on the loan-to-value ratio.

For a $350,000 vacation home, a 4.125% fee adds nearly $14,500 to the upfront cost. Borrowers can also accept a higher rate in lieu of paying the extra fee. That can translate into a significantly higher rate than vacation home mortgages required last year, even if there wasn't a historic rate jump since that time.

While this is tough news for second-home buyers, it should open up more inventory for first-time buyers searching in destination areas that have become so popular during the pandemic. It also signals that there is in fact a ceiling to this market – even for wealthy vacation home buyers.

Slowing pains

Just like a summer barbeque in Death Valley, even after you break up the coals, the grill is going to stay hot for quite a while.

The market may finally be showing signs of slowing, but it comes at the cost of mortgage rates in the 4’s and 5’s and record low inventory. It will take months, if not years, of higher mortgage rates and sustained inventory growth to rebalance the market and corral price growth.