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The housing market, at last, appears to be cooling off

Sellers are still reluctant to lower prices but houses are sitting on the market longer and buyers have more options

Several contractors stand on the roof of a house under construction in Louisville earlier this month. (Luke Sharrett/Bloomberg News)

After a stunning rise in home prices enriched sellers and keyed up buyers into frantic bidding wars, there are signs that the U.S. housing market is starting to cool amid a surge of new inventory and higher interest rates.

“For Sale” signs are multiplying in previously hot markets like San Jose, Chicago and Phoenix. The volume of U.S. monthly home sales registered double-digit declines in the past year, according to estimates from Zillow and the National Association of Realtors. In May alone, the number of houses sold is down 19 percent from the previous year, and preliminary data suggests the falloff was more pronounced in June.

“This year’s buyers are just much more savvy, and they deserve to be because they’re going to be paying more to purchase the home,” said Daniel Valdez, an agent with eXp Realty in Sacramento. The slowdown has, so far, provided little relief to buyers. Instead, analysts say, a growing affordability crisis, driven by the collision of inflation and rising interest rates, is forcing many potential buyers to walk away.

That is because some sellers, mindful of the stratospheric gains of 2020 and 2021, which brought the average home price up more than 40 percent, are reluctant to lower their expectations. And home values are still gaining, up 19 percent on average in the year ending in June, according to the data firm Black Knight.

“The market is cooling off, but that cooling has happened on the backs of buyers getting discouraged, on buyers being forced out of the market,” said Jeff Tucker, a senior economist at Zillow. “People who thought they would join the party are being greeted by absolute carnage as far as affordability right now.”

The cooling housing market reflects broader changes in the economy as policymakers work to get decades-high inflation under control. Rock-bottom interest rates in 2020 and 2021 helped fuel the surge in housing prices since the start of the coronavirus pandemic.

But the Federal Reserve reversed course this year after inflation spiked, making the price of food, fuel, housing and other essentials a dominant economic concern. The central bank has bumped up its benchmark interest rate three times in 2022 and signaled that four more increases are pending. The most recent hike in June was three-quarters of a percentage point, the largest since 1994.

Higher rates means higher borrowing costs. The average rate for a 30-year fixed rate mortgage is now at 5.3 percent, according to Freddie Mac, up from 2.9 percent a year ago. It also coincides with a battered stock market and higher costs for just about everything, making it harder to save for a down payment. The resulting “affordability squeeze” is keeping many buyers out and leading to fewer deals, analysts said.

Rachel Payne, a public school teacher in Northern Virginia, said she gave up on her search recently after her dream home fell through. She and her fiance, a professional poker player, put in an offer of over $1 million on a four-bedroom house in the Belle Haven neighborhood of Alexandria, but the seller wanted to waive an inspection.

That struck them as too risky, and they turned it down, she said. A week later they saw it sell for the same price. “It’s a truly terrible time to be a first-time home buyer,” said Nicholas Gerli, founder and chief executive of Reventure Consulting.

Calculate how much more mortgages will cost as interest rates rise

Ali Wolf, chief economist at Zonda, says signs of cooling down are everywhere. There is significantly more inventory in some places, residences are sitting on the market for longer, and many sellers are cutting their asking price to drum up interest, she said.

“What we are seeing today is that buyers do, in fact, have a limit,” Wolf said. “Prospective home buyers have gotten to the place that they are either intentionally stepping out of the housing market as they wait and see what happens next or are forced out of the housing market given the higher costs of homeownership.”

Housing inventory, which refers to the number of active listings, has swelled in some of the most expensive metropolitan areas, according to Redfin data. It is up 47 percent in Denver, 43 percent in Oakland, Calif., and 10 percent in San Jose. Some markets that transformed during the pandemic have also pumped the brakes, says Eric Finnigan, director at John Burns Real Estate Consulting.

Boise, which became a pandemic haven for its cheap real estate and proximity to the Rocky Mountains, appears to have found its ceiling, Finnigan said. Home values there exploded 57 percent in 2020 and 2021 as people flooded into Idaho’s largest city. But prices have grown just 3 percent between January and May, marking a turnaround that Finnigan called “stunning.”

Many of the first-time buyers who landed homes since 2020 wound up paying more than they thought it was worth or asked family members for help. After renting for just shy of a decade, Myles Hughes, 32, wanted a place of his own. Late last year, he got married and moved from Florida to Albuquerque for a change of scenery.

Hughes, a site manager at a space rental company and an actor and independent filmmaker, said he was outmaneuvered by other house hunters at every turn. He visited dozens of properties over the course of four to five months, he said, but many of his serious contenders were swept off the market within days.

He lost out on six properties, he said, even though he submitted bids quickly and increasingly above asking price. As the search dragged into months, interest rates kept climbing, as did asking prices, highlighting how it often takes time for sellers to adjust to new economic conditions and the squeezed budgets of buyers brought on by the Fed.

It was bid No. 7 that won Hughes his new three-bedroom, two-and-a-half bathroom home. But it took help from his dad, who put up the money for an all cash offer. “We could only afford to fight in the bidding wars so much,” he said.

The lack of affordable options has frustrated buyers and sellers alike, analysts said. The “30 percent rule,” a financial planning maxim that holds that a person should pay no more than 30 percent of their income into real estate, is being upended as a result. Black Knight reported that the typical payment-to-income ratio, based on higher interest rates and prices, has spiked from 24 percent to 36 percent since January. By this measure, housing is at its least affordable point since the early 1980s.

Brian Brackeen, who runs Lightship Capital in Cincinnati, has seen the changing dynamics of the housing market firsthand. He bought a home of his own at the end of last year, then bought his daughter a starter home in Tulsa in April.

For that starter home, the rate was much higher and the down payment considerations were more difficult, he said. Brackeen also noticed a shift in the attitudes of sellers, where many are stubbornly holding onto high asking prices even as the market is shifting out of their favor.

“If you are a seller and you are so close to the gold rush, you don’t want to give that money up when your friends sold for top dollar, on the first day with multiple offers,” he said. Brackeen also saw the pool of prospective buyers changing.

“The world that current sellers are dealing with is more like their normal local market, not the prior coronavirus-fueled supermarket, where people from all over the country are coming into each other’s markets and inflating the number of buyers in any given place,” Brackeen said.

In the end, his daughter’s home appraised below the purchase price, so both parties had to give up several thousand dollars, he said. “The frothiness of the market is not what it used to be.”

Yiwen Lu and Kathy Orton contributed to this report.