by Dana George | Updated July 19, 2021 - First published on June 22, 2021
Many or all of the products here are from our partners. We may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.
Few things last forever, even a red-hot housing market.
There's no denying that the real estate market is currently on a wild ride. More homes sold in 2020 than any year since 2006 despite a global pandemic. And while it looks like the market will continue to sizzle for the foreseeable future, it will not last forever.
Historically speaking, the housing market has been like a yo-yo, up one moment and down the next. The "ups" and "downs" may last for months or years, but it is inevitable that the current market will cool at some point. Although it's impossible to predict when, there are at least five signs to look out for.
Secure access to The Ascent's free guide that reveals how to get the lowest mortgage rate for your new home purchase or when refinancing. Rates are still at multi-decade lows so take action today to avoid missing out.
By submitting your email address, you consent to us sending you money tips along with products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Statement and Terms & Conditions.
The fact that the Federal Reserve set the prime rate near zero in order to combat the pandemic-fueled recession has been the primary driver of home sales. While the prime rate is not the rate we pay for a mortgage, it is one of the factors mortgage lenders use when they set rates for loans.
Basically, when the prime rate goes up, you can expect mortgage rates to follow. And with each upward tick of the interest rate, a buyer must do one of three things:
As interest rates rise, buyers can afford less, making the temptation to buy a home less of a factor.
Another factor driving record-high sales prices is lack of inventory. Between March, 2020 and March, 2021, housing inventory was down by more than 28%. With less inventory from which to choose, buyers hoping to take advantage of low interest rates competed with other buyers hoping to do the same thing. At some point, the log jam will break, more homes will come on the market, and buyers will not be so desperate to "win" a bidding war that they're willing to forego contingencies (like home inspections). An increase in inventory does not mean that home sales will slow (particularly if the interest rate remains low). What it will lead to is less desperate buyers and more realistic sales prices.
As inventory rises, so do the number of days most houses linger on the market. The longer a house is on the market, the more likely the seller will be open to negotiations. Once homeowners are willing to negotiate and buyers feel safe writing contingencies back into their sales offers, it's a good sign that the housing market is beginning to equalize.
At some point, the number of people willing to fight for a house in this tight market will dwindle. In short, serious buyers will have purchased a home or dropped out of the market long enough to allow things to cool. There are only so many people with the finances and desire to buy a house. Once their needs have been met, we're likely to experience a market that feels somewhat "normal."
Another pandemic, a new war, political upheaval, a series of natural disasters, or a slower than forecasted economic recovery can all contribute to a slowdown in the housing market. Of course, good things could happen as well. The economic recovery could be more robust than forecasted, the price of materials could drop, and new builds could pick up at a rapid pace. The strength of the housing market is precariously balanced on circumstances we can't predict but always react to.
What's going on in your life may not impact the housing market as a whole, but it should inform your decisions.
If you're buying a home with someone else and the relationship is shaky, it's worth pulling away from house hunting until you're on solid ground. If you're in a job you hate and want to start your own business, now may not be the right time to commit to a new mortgage. If you're simply uncomfortable with marrying yourself to a huge loan that may prevent you from following other dreams, there's no rule saying that you must buy a house.
Even if the housing market stays hot for the next two or three years, you may decide now is not a good time to buy a home. And that's fine. Homeownership is not for everyone, despite any rumor to the contrary. If there's any part of you that's cool to the idea of signing a mortgage, pay attention. When it comes to making a commitment, your voice is the one that matters.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
The Ascent's in-house mortgages expert recommends this company to find a low rate - and in fact he used them himself to refi (twice!). Click here to learn more and see your rate. While it doesn't influence our opinions of products, we do receive compensation from partners whose offers appear here. We're on your side, always. See The Ascent's full advertiser disclosure here.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.