Have We Started Down the Slippery Slope to a Housing Crash?

The times, they are a-changin’. The mercurial real estate market now has more sellers than buyers, as Redfin reports that sluggish home prices have grown at their slowest pace in two years, active listings have hit a five-year high, and existing home sales have hit a seven-month low.

We’re a long way from the double-digit yearly price increases experienced after the end of the pandemic. According to Redfin’s data, median home sale prices increased a meager 0.7% nationally year over year in May—the slowest growth in two years. 

However, house prices are still out of reach for many. May’s median sales price of $440,997 was the highest of any May in 13 years. However, those stats might not hold up for long, as certain sections of the country have already seen prices begin to tumble, with major cities in California and the Sunbelt experiencing declines, and more are expected to follow suit should interest rates remain high.

“The market has been shifting in buyers’ favor, but it doesn’t feel that way to many Americans, because homebuying costs remain near record highs,” said Redfin senior economist Asad Khan in the Redfin press release. “Buyers may gain more negotiating power in the coming months as more sellers face a tough reality: Sellers no longer hold all the cards.”

Fewer Offers Are Over Asking Price

In an indication of how things have changed since the Federal Reserve raised rates and kept them elevated amid stubborn inflation, offers over asking price are now relatively rare, with under a third (28%) falling into that category, a sharp decline from the same period in 2022 when over half of all sales (53%) went for over asking.

For sellers, Redfin agents offered some poignant advice: Price realistically, be willing to negotiate, and present your homes in the best possible condition. 

With Fewer New Homes for Sale, Existing Listings Linger

New listings are down 2.9% month over month as sellers put the brakes on in light of the market slowdown. Active listings increased, however, as existing houses for sale failed to find buyers.

Said Rob Wittman, a Redfin Premier real estate agent in the Washington, D.C. area, in the Redfin press release:

“We’ve hit a plateau with home prices. A lot of homeowners are considering renting their homes out instead of selling. The buyers who come through on tour these days have little urgency. They’re often browsing instead of buying because they’re hoping mortgage rates will come down, even though that’s unlikely to happen soon.”

The Northeast Is Still a Hot Market

The country is still primarily comprised of regional markets. While prices are down or stagnant in parts of the Sunbelt, they are up in certain parts of the Northeast, fueled in part by low inventory. For example:

• Philadelphia: 10.9%
• New Brunswick, New Jersey: 8.4%
• Providence, Rhode Island: 7.7%

In Newark, New Jersey, homes had a 69.1% chance of selling above list price—the highest percentage in the nation. On the other coast, demand for housing from the tech industry has made California cities, San Jose (60%) and San Francisco (59.9%), the next most likely homes to sell above their list price.  

Conversely, homes in Florida were least likely to sell above their list price in six of the 10 metros. Only one market, Detroit, saw active listings fall, and that was only by 0.2%. 

According to the S&P CoreLogic Case-Shiller Index, released on June 24, New York experienced the largest price increase annually, at 7.9%, followed by Chicago at 6% and Detroit at 5.5%. 

“What’s particularly striking is how this cycle has reshuffled regional leadership—markets that were pandemic darlings are now lagging, while historically steady performers in the Midwest and Northeast are setting the pace,” Nicholas Godec, head of fixed income at S&P Dow Jones Indices, said in a press release. “This rotation signals a maturing market that’s increasingly driven by fundamentals rather than speculative fervor.”

The Middle Class Has Been Priced Out

Affordability amongst the middle class continues to plague the market, with interest rates and house prices out of reach for many buyers. According to an analysis by NAR and Realtor.com, households generating $100,000 a year could only afford to buy 37% of the homes listed on the market in March. In 2019—six short years ago—those in this income class could have purchased 65% of the homes on the market.

“With the interest rates, everyone’s looking for a deal,” Dana Hall-Bradley, a real estate agent in Celebration, Florida, told The Wall Street Journal. “The buyers are not making decisions as quickly as they were during the pandemic days.” The Journal reported that one in four listings on Zillow got a price cut in May.

Despite the unaffordability, house prices have not decreased significantly. Instead, price growth has slowed to a snail’s pace. “Consumers are not getting into the market,” Lawrence Yun, NAR’s chief economist, told The Journal. “I would attribute that to the affordability challenges.”

These challenges have resulted in a gradual accumulation of inventory, with the market now experiencing more sellers than buyers in many parts of the country.

“Shoppers see more homes for sale today than one year ago, and encouragingly, many of these homes have been added at moderate-income price points,” Realtor.com chief economist Danielle Hale said in a press release. “We still don’t have an abundance of homes that are affordable to low- and moderate-income households, and the progress that we’ve seen is not happening everywhere. It’s been concentrated in the Midwest and the South.”

Final Thoughts: Practical Moves for Investors

As inventory begins to accumulate, inevitably, prices will eventually come down. Until that happens, unless buyers can negotiate a deal at a deep discount, it’s better to wait a few months to see how substantial the price drop will be by the end of the year, as well as what moves the Fed might make regarding interest rates.

For landlords, running cash flow numbers at the current interest rates will give you an indication of whether you should buy or not. Cash flow will not be positive unless you are prepared to make a large down payment. 

For flippers, projecting potential profit based on your after-repair value (ARV) is a market-to-market proposition. If you’re in some areas of the Northeast, it’s still possible to eke out a living from flipping homes. Finding them, however, is likely to be a more difficult proposition.