The housing market is slowing—but don’t mistake it for a crash

There isn’t just one reason why the housing market—which went on a historic run during the pandemic—is cooling down. Some of it can be attributed to more sellers finally feeling comfortable enough to move during a pandemic. At the same time some would-be homebuyers, facing record prices, have been simply priced out. Then there’s seasonality, in the form of the slowing that occurs annually as summer vacations pick up and students return to school—which has finally returned to the market after being absent during the 2020 shutdowns.

That said, don’t mistake this softening for a correction. Even given some recent cooling, the housing market is still fairly strong.

Look no further than the data on bidding wars. In April, 74.3% of homes were getting multiple offers, according to Redfin data. By August, that rate was down to 59.4%. But while bidding wars are tamping down a bit, they’re still well above their pre-pandemic levels. The bidding war rate was 42% in August 2018 (a red-hot year, by normal standards) and 10.4% in August 2019 (a slower year).

“We often refer to this as normalizing,” says Jody Kahn, senior vice president of research at John Burns Real Estate Consulting, a real estate research firm. “We’re not fond of headlines that imply that the housing market is coming to a screeching halt, since that’s not accurately what’s happening. But we do like that things are easing a bit.”

Since the onset of the pandemic, median list prices are up a staggering 23% on realtor.com. That level of price growth, which far exceeds most Americans’ annual pay raises, just isn’t sustainable, Kahn says. That’s something Fortune has repeatedly heard from industry insiders this summer: The bigger threat to the housing market isn’t demand falling off, it’s the market going too high and thus overheating. That threat also explains why Kahn and even many homebuilders are happy to see some “softening.”

While homebuyers shouldn’t expect to see markdowns, they could see price growth continue to slide. Between April 2020 and April 2021, median home list prices on realtor.com soared 17.2%. Over the most recent 12-month period (Sept. 2020 to Sept. 2021) that rate was down to 8.6%. If forecasts are right, it could slow further. Indeed, CoreLogic, a real estate research firm, projects a 2.7% appreciation in the coming 12 months, while Freddie Mac and John Burns Real Estate Consulting forecast 2022 home price growth of 5.3% and 4%, respectively.

Why are prices expected to continue growing?

It’s very simple economics: Demand continues to outmatch supply. The former took off during the pandemic as workers took advantage of recession-spurred low mortgage rates and their increased remote flexibility to buy homes further out in the ‘burbs. The pandemic has also coincided with the largest tranche of millennials (in particular, those born 1989 through 1993) beginning to hit their 30s—typically the big first-time home-buying years. All of this increased demand is why inventory dried up during the pandemic. Between April 2020 and April 2021, inventory of homes for sale on realtor.com fell 53%. While that has improved recently, we’re still pretty close to a 40-year low in inventory.

But that doesn’t mean the housing market is free of risk. The biggest unknown comes from mortgage rates. The average 30-year fixed mortgage rate of 3% is expected to rise in the coming years. But inflation fears could cause the Federal Reserve to raise rates sooner than expected. That would, of course, negatively impact the housing market.

Then there’s mortgage forbearance, which began its long-awaited wind down on Sept. 30. As a result, over the coming year more than 1.5 million homeowners will have to restart paying their mortgages. Some won’t be able to, and they’ll have to put their homes up for sale. Zillow estimates that around 25% of those 1.5 million borrowers will eventually list their home. That’s expected to cause additional slowing in price appreciation.

Finally, there are rising material and labor costs. While the lumber bubble has burst, there are many materials, like concrete and rubber, whose prices are still rising. Even that lumber relief might not last: Lumber prices are up 27% over the past six weeks. Unlike forbearance and mortgage rates, this would affect the market in the opposite direction: If those costs continue to rise, it’d add to the price tag of new homes.