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Why Slowing Home Sales May Be a Sign That Prices Have Gotten Too High

- Money; Shutterstock
Money; Shutterstock

Home sales are slowing down as buyers struggle to find homes they can afford.

The number of existing home sales has dropped for three consecutive months. In April, sales hit a seasonally-adjusted annual rate of 5.85 million, down 2.7% from March. Sales of newly built homes were down even more and pending home sales, which measures pre-sale contracts, indicated May will also show a decline when the numbers come out later this month.

Meanwhile, the median existing sale price increased 19.1% year-over-year to $341,600 in April, the ninth consecutive month of double-digit price gains. Home prices have been increasing since last summer as record-low mortgage rates led to a surge in buyer demand — but high prices may finally be taking a toll.

“In general, poor affordability reduces the number of buyers in the market and should slow sales,” says Ralph McLaughlin, chief economist at home investment real estate startup Haus. “Recent data — showing lower purchase mortgage applications and slowing home sales — suggest that demand may be cooling.”

It’s still a seller's market

Despite the recent slowdown, sales are still up compared to a year ago. Pending sales are nearly 52% higher than in April 2020 and existing home sales are up 34%. The year-over-year comparison is skewed because the real estate market was at rock bottom last April due to pandemic lockdowns, but it illustrates just how good the last year has been for sellers.

In April, 72% of all offers were involved in a bidding war, according to online brokerage Redfin. One D.C. area home recently had 88 offers — most all cash. The increased competition has led to most homes selling for thousands of dollars above asking price.

“The market has a very, very long way to go before inventory levels begin pushing it towards a buyer’s market,” says McLaughlin.

McLaughlin and other experts don’t expect home prices to crash anytime soon, as there continues to be more people interested in buying a home than there is current inventory. But eventually, prices should come down closer to income growth levels and settle in at a more reasonable 4% to 5% annual growth rate, he says.

At the end of April, total inventory stood at 1.16 million homes — a 2.4 month supply at the current pace of sales. That was a 10.5% increase over March, but still far below the 6 month supply economists considered healthy.

Buyers should be prepared — and patient

If you’re considering purchasing a home this year, be ready to be patient. Competition for available homes is still high, but as the supply crunch eases, there may be more opportunities to buy.

McLaughlin recommends lining up all the pieces that go into a home purchase ahead of time. This includes finding the right lender, real estate agent, home inspector and title company. Getting pre-approved for a mortgage is a must.

And if you don’t find your dream home this year, don’t be discouraged.

“There’s no shame in waiting until next year, when inventory levels might be more reasonable and the pace of the market slower,” says McLaughlin.

More from Money:

'FOMO Took Over.' Some Buyers Who Caved to a Hot Housing Market Now Regret It

Half of Homes Are Selling for Over Asking Price. Here's How to Decide What to Bid

When Will the Housing Market Crash? Experts Weigh In

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