Signs are piling up that the housing market is cooling down

Signs are emerging that the once-hot housing market may finally be cooling down.

Bidding wars are down, sellers are cutting listing prices, and buyers have headed for the exits as higher mortgage rates put them over budget.

But experts don’t expect the downturn to be nearly as rough as the housing crash that preceded the Great Recession.

“The housing market appears to be at a turning point,” Doug Duncan, senior vice president and chief economist at Fannie Mae, told Yahoo Money. “Right now, we forecast a mild recession in the second half of 2023 due in part to a slowdown in housing activity and tightening financial conditions, which will slow mortgage demand.”

Sellers are already seeing a shift among homebuyers.

Last month, 61% of home offers faced a bidding war — when an agent reported at least one competing bid — down from 63% in March and 67% a year ago on an adjusted basis, according to a recent Redfin study.

In April, 76% of Americans said it’s a bad time to purchase a house, according to Fannie Mae’s Home Purchase Sentiment Index, up from 73% in March. Overall, Americans’ attitude toward buying a home has fallen to its lowest level since May 2020.

The pullback is palpable.

The volume of mortgage applications to purchase a home dropped 12% the week ending May 13 — the latest data available from the Mortgage Bankers Association — from the previous week. The activity was 15% lower than a year ago.

As buyer interest wanes, a growing share of sellers nationwide have been forced to reduce listing prices – especially those in large metropolitan areas, according to data from Realtor.com. Nationally, the share of homes that were marked down in April increased 1.3 percentage points to 6.9% year over year.

“Sellers are finally starting to drop their prices at rates that we haven't seen since before the pandemic,” Daryl Fairweather, chief economist at Redfin, told Yahoo Money. “Home sellers are now rushing to find a buyer before demand gets any weaker.”

One of the big factors cooling demand is rapidly rising mortgage rates.

While the rate on the 30-year fixed mortgage — the most common home loan for purchases — inched down to 5.25% last week from 5.3% the prior one, per Freddie Mac, it remains over 2 percentage points higher since the start of the year.

That has sent the monthly mortgage payment skyrocketing. At the beginning of 2022, the payment on a median home for sale was under $1,700. Now it’s near $2,450, according to Redfin data.

“First-time and entry-level homebuyers are experiencing the brunt of a rise in mortgage interest rates,” Duncan said. “This is a significant and serious affordability shift, because income is not increasing at a similar pace. Wages have increased nominally, but inflation has gone up as well, challenging any wage gains on a real basis.”

Rising prices are also seeping into the home-building process, with building material costs up 19% from a year ago, according to Robert Dietz, chief economist at NAHB. That's weighed on builders’ confidence as well, which fell for the fifth straight month in May to the lowest reading since June 2020.

With higher mortgage rates, “less than 50% of new and existing home sales are affordable for a typical family,” Dietz said in a press statement. “The housing market is facing growing challenges.”

Fannie Mae’s Duncan expects the slowdown to mean home sales this year will shrink 10% to 11% from 2021. Already, existing home sales and new home sales are down. But a crash like the one from more than decade ago is unlikely, according to David Berson, senior vice president and chief economist at Nationwide Mutual.

“The housing market is cooling and we’re likely past the peak in home sales — especially for existing homes. House price gains have been unsustainably rapid – even faster than during the housing boom of 2002-2006,” Berson told Yahoo Money. “Importantly, this won’t be a repeat of the housing bust of 2008-2010. The people who bought homes over the past decade can actually afford the mortgages they got.”

Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda

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