Signs That a Housing Market is Cooling Off

Markets across California continue to sizzle, making it difficult to even remember what a soft housing market is like. That said, things can’t continue on this path forever, and as historical patterns have dictated, things will likely start to slow down at some point. Knowing the signs of a cooling market can help you better prepare yourself and plan your strategy for either entering, exiting, or staying in the market.

Here are some tell-tale clues that may indicate that the market is cooling.

Listing Prices Are Plateauing

A strong housing market is characterized by a number of factors, and listing prices are one of them. In this type of market, you’ll usually see listing prices rise rather quickly. But when things start to slow down in the market, listing prices will typically level off.

Sometimes, prices may even dip temporarily as the market corrects itself. When demand starts to falter, sellers start reducing their listing prices to generate more interest.

Gaps Between Listing and Sale Prices Widen

In sizzling housing markets, sale prices are as close to listing prices as you can get. Homes often sell at full asking price and many times well over. Your real estate agent will be able to pull a report of similar homes that have sold in the area recently. If there’s a big discrepancy between the original asking price and the final sale price, that could be a sign of things settling down. The larger the gap in prices, the slower the housing demand is likely to be.

Houses Sit on the Market Longer

The average number of days on the market (DOM) is a good indicator of how strong the market is. Depending on the location, the average DOM will vary quite a bit, While the average DOM in one area may be 30 days, it could be as little as a week in others. The key is to know what the average is in a specific area to provide a base to compare to. If homes are taking longer than the average DOM to sell, that’s a good sign that things are starting to cool down in the housing market.

More Inventory

More houses on the market could be a sign that the market is plateauing. When a real estate market starts to cool, one of the first things you may notice is more homes for sale. The higher the supply, the lower the demand. It’s a simple and fundamental rule in economics. Hot markets are usually characterized by little inventory that flies off the shelves shortly after being listed. The opposite is true in cooling markets.

Investor Activity Slows

Generally speaking, heavy investor buying and selling are associated with a hot real estate market, but when investor activity starts to slow, that’s often a sign that the overall market is slowing too.

While many investors often make all-cash purchases, many others still leverage their money and take out loans to finance their investments. A smaller number of investors taking out financing products can be indicative of a slowing market. Your agent or mortgage broker may be able to find out what type of loan activity is taking place among investors.

Higher Mortgage Rates

Lower mortgage interest rates make borrowing money to buy a home more affordable, prompting more buyers to get into the market. But as interest rates start to climb, financing becomes a much more expensive endeavor, which can be an obstacle for many would-be buyers. Fewer borrowers taking out mortgages often means fewer buyers on the prowl for a home, reducing overall demand.

The Bottom Line

Being familiar with the real estate market in your area is an important part of being an informed buyer or seller. If you’re adequately prepared for what’s to come, you’ll be in a better position to ensure a successful real estate transaction. A cooling market might not be the best time to sell, but if you’re ready to make a home purchase, looking out for the signs of a softening market can help you buy at the perfect time.