Most people know that the real estate market has been “hot” for the past few years, with home prices skyrocketing in nearly all areas and limited inventory, driving up competition for buyers.
For home sellers, this has been a gift. Selling your home in this market is ridiculously easy; after listing the house, you’ll likely receive multiple offers above asking price, and well above whatever price you paid for it originally.
However, these hot conditions can’t last forever. Typically, the real estate market experiences cycles of growth and shrinkage, with alternating conditions that favor sellers and buyers.
For all the people waiting for their chance to buy a home for a reasonable price, this is good news – but when can we expect these changes to come? When will the real estate market begin to cool again?
Factors Responsible for the Surge
Let’s start by examining some of the factors responsible for the surge in prices in the first place:
- Low interest rates. The Federal Reserve interest rate has been low for many, many years, and it got slashed even lower in the wake of the COVID-19 pandemic. A low Federal Reserve interest rate allows banks to offer lower interest rates for loans like mortgages.
- In turn, consumers face lower interest rates when buying homes, leading to lower monthly costs of home ownership. Because of this, more people flock to buy homes – and spend more money on a home than they would otherwise.
- Shrinking inventory. Inventory is also limited. There are only so many homes currently in existence, and construction rates are slow, unable to keep up with rising demand. On top of that, during the pandemic, many older homeowners were unwilling to sell their homes due to lockdowns and pandemic-related fears.
- High demand. On the flip side, buyers are interested in buying homes at a much higher rate. There are many factors driving high demand, including low interest rates – and the fact that working from home is becoming more common, allowing people to work wherever they want.
- Investor desire. It’s also worth noting that several major investment firms in the United States (and internationally) have shown increased interest in buying up single-family homes as investment properties. This has led to a surge of competition that buyers otherwise wouldn’t have to face.
What Could Bring a Cooling Phase
So what, exactly, could spur the onset of a “cooling” phase, where prices begin to lower and demand starts to shrink?
As you might imagine, the answer is complicated. While a market crash is always a possibility, it isn’t particularly likely; in other words, prices won’t drop overnight. Instead, we’ll likely see a gradual transition, over the course of months, or even years, as the real estate market settles down.
This could be spurred by a combination of factors such as the following:
- Rising interest rates. If the Federal Reserve or banks decide to raise interest rates, it would put a damper on buying activity for the foreseeable future.
- New construction. Construction companies are trying to keep up with demand, building new homes at a higher rate. If they can continue this momentum, it could eliminate the “high demand, low supply” problem.
- Sudden willingness to sell. Of course, the supply problem could also be resolved by more people being willing to sell.
- Economic turmoil. Economic turmoil could also influence the housing market. If there’s a sudden economic recession that causes people to lose their jobs or fear for the future of the country, it could stifle buying activity for years.
It’s also important to note that while the “real estate market” overall in the United States is characterized by broad trends that are followed in many areas, there are millions of local real estate markets following their own trajectories. Some major urban areas are seeing surges of growth even beyond the average for the country, while some rural cities are seeing stable, or even decreasing prices.
If you’re flexible on where you want to live, you may be able to find an area or local market where the conditions are more favorable to buyers – and you can do that now, without waiting for a market cooling period.
The Bottom Line
The bottom line here is that the real estate market goes through cycles. These cycles aren’t always consistent or predictable, but they are reliable. Just as prices and demand rose in the past few years, we’ll likely see prices and demand shrink in the near- to mid-term future.
What remains to be seen is just how much of an impact that cooling period will have and when it will begin to sink in. In the meantime, think carefully about your real estate investing decisions and don’t try too hard to time the market.
Larry Alton is a professional blogger, writer, and researcher. A graduate of Iowa State University, he's now a full-time freelance writer and business consultant. Currently, Larry writes for Entrepreneur.com, Inc.com, and Forbes.com, among others. In addition to journalism, technical writing and in-depth research, he's also active in his community and spends weekends volunteering with a local non-profit literacy organization and rock climbing. Follow him on Twitter (@LarryAlton3), at LinkedIn.com/in/larryalton, and on his website, LarryAlton.com. Read Larry Alton's Reports — More Here.
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