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During the second half of 2020, mortgage rates dropped to record lows and new home listings slowed down. That created a massive surge in home buyer demand. And it’s that very level of demand that’s kept home prices sky-high ever since.
But recent housing market data shows that things may finally be cooling off. And so if you’ve been struggling to purchase a home, you may soon be in for some relief.
Sales finally slowed down
In May, existing home sales dropped by 3.4% compared to the previous month, according to new data from the National Association of Realtors. Compared to May of 2021, they were down 8.6%.
That represents the weakest monthly reading since June of 2020. However, as we all know, June of 2020 was only a few months after the COVID-19 outbreak erupted. So adjusting for that, experts are saying that May’s reading is actually the lowest since January of 2020, before the pandemic would have impacted the housing market.
Good news for buyers?
A slower sales pace could indicate that buyers are finally saying no to sky-high home prices and rising mortgage rates. And if buyers continue to pull out of the market, it should drive home prices downward by closing the gap between supply and demand.
But let’s also recognize that home sales slowed down in May in part because of a lack of inventory. As of the end of May 2022, there were 1.16 million homes available for sale. That’s 4.1% lower than the number of available homes in May of 2021. And at the current sales pace, that represents just a 2.6-month supply of homes.
Meanwhile, it takes more like a 4- to 6-month supply of homes to create an equalized housing market that doesn’t glaringly favor sellers like today’s market. But as buyer demand wanes and housing inventory ticks up, we’re getting closer to that point. And that’s definitely a good thing for buyers.
How to gear up to buy a home
If you’ve been waiting for the housing market to cool off before purchasing a home, you may have an opportunity to pounce sooner than expected. But to that end, you’ll want to make sure you’re really in a strong position to buy.
In that regard, check your credit report to make sure there are no red flags and that your credit score is decent. It takes a minimum credit score of 620 to qualify for a conventional home loan, but most mortgage lenders will want to see a higher number. And if you want to snag a competitive interest rate on your home loan — an important thing to do at a time when rates are up across the board — then you’ll generally need a credit score in the mid- to upper-700s or higher.
At the same time, set a home-buying budget and aim to have enough cash on hand for a 20% down payment on a conventional mortgage. Hitting that mark will help you avoid private mortgage insurance, a costly premium you probably don’t want to face at a time when housing prices are still high and mortgages have gotten more expensive to take out.
The fact that home sales are slowing could spell relief for buyers. Granted, we can’t say with certainty when home prices will start to drop to a notable degree, but buyers should keep the faith that we’ll get there — perhaps sooner than expected.
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