Housing Market Is Cooling… Good News for Buyers?
The housing market in California has been red hot since last July with home sales for the first half of 2021 surging above last year by 34 percent. Home prices, meanwhile, continue to climb with the statewide median price setting record highs for four straight months since March 2021. On the other hand, supply remained tight as for-sale properties consistently dipped below year-ago levels by 40 - 50 percent in the first half of the year.
The imbalance between supply and demand has created headaches for homebuyers, as market competition remains intense while housing affordability continues to decline. Half of all new listings in the second quarter of 2021 were off the shelf within seven or eight days after being listed, and 70 percent of the homes were sold above their asking price.
Despite the impressive performance in the first six months of the year, the market momentum appears to be slowing as we move into the third quarter. According to the latest housing report released by the California Association of REALTORS® (C.A.R.), statewide home sales declined on a month-to-month basis for the second straight month in June, while pending sales dipped for the first time since May 2020. The housing market is showing signs of cooling down as we enter the summer season.
The market cool-off could be a sigh of relief for potential buyers, however. As the market resumes its seasonal normality, housing supply will likely increase in the next couple months before it starts declining in the fourth quarter as the market enters the holiday season. Assuming that the market follows a typical seasonal pattern this year, supply should improve further before the end of the summer with active listings rising 4.3 percent in July and another 1.3 percent in August.
With inventory inching up and demand slowing as the market reaches the end of a traditional buying season, market competition should cool off in the coming months. For sale properties, for example, should have a longer shelf life in the off season. The median days on market should increase an average of five days in September when compared to June, based on pre-pandemic market trends observed between 2015 and 2019. The sales-price-to-list-price ratio – another measure of market competitiveness, is also expected to come down for the rest of the year. Between 2015 and 2019, the ratio declined an average of 0.98 percent from June to September and dropped an average of 0.55 percent from September to December.
With the pace of the economic recovery likely to slow in the second half of the year, interest rates will inch up but should not rise rapidly in the short term. Higher inflation observed in the recent months will put upward pressure on rates, but the average 30-year fixed rate mortgage should remain below 3.25 percent at the end of the year. As the market takes a breather in the coming months and rates remain near record lows, homebuyers who missed the opportunity earlier will have another chance to test the market (and their luck) again.
By CALIFORNIA ASSOCIATION OF REALTORS