The Housing Market Cools Down

New data show that the “hot” housing market — which sent home prices sky-high — could now be changing course.

Recent data from the Census Bureau showed that new home sales went down by 16.6% in April from the previous month. Analysts had expected a drop of 1.7%. That’s the fourth month in a row that new home sales have gone down. Existing home sales slipped 2.4% month over month, according to the National Association of Realtors.

The short supply of homes for sale, which has been a big problem, is now on the rise, and demand for homes seems to be going down as fewer people are touring homes. Redfin reported that 15% of people selling a home in April reduced their asking price. A year ago, only 9% of homeowners did a price drop.

Hikes in interest rates are likely a big part of it. The Federal Reserve has tried to calm down the housing market by increasing rates over the last few months. In December, the average 30-year fixed mortgage was 3.11%, and recently the number’s been over 5% — the highest rate since 2009.

The higher rate means people can’t afford to borrow as much, as they are looking at a much higher mortgage, and some are delaying buying homes altogether. However, the prices aren’t going down immediately — while they are dropping, most homes are still selling for more than their asking price and selling very quickly.

Some experts say that it’s also going to take some time to get through the high demand created by a shortage of inventory over the past several years. Essentially, there’s a backlog of buyers lined up to get homes, but once that backlog of buyers runs out, the housing market could drop further.

The rise in interest rates means that Americans are spending significantly more of their paychecks on housing now than just a few months ago. In December, the average American household would have to pay 24% of its monthly income to pay a mortgage on the average-priced home in the U.S. By May of 2022, the average American would have to spend 34% of their income to pay for the same house, according to Black Knight, a mortgage tech and data provider. Again, that’s the biggest number since 2006.

As far as whether or not Americans are in a housing bubble, it depends on who you ask. Some experts are saying we’ve seen similar conditions in the lead-up to past housing bubbles. Mark Zandi, a chief economist of Moody’s Analytics, told Fortune that increasing mortgage rates should create year-over-year growth of home prices to go down to zero by this same time period next year. Right now, year over year growth is up 19.8%. If that happens, it would be the slowest home price growth rate since April 2011 to April 2012.

Zandi said he is anticipating that some of the most overpriced housing markets in the U.S. will actually go down between 5 to 10% over the next year. Specifically, he pointed to Charlotte, North Carolina, and Phoenix, Arizona, as locations where this correction of house prices could happen. However, those cities aren’t alone. An analysis provided by Moody’s Analytics to Fortune found that 96% of regional housing markets are overvalued, some by more than 30%.

Another analysis by the Real Estate Initiative at Florida Atlantic University found that every one of America’s 100 biggest housing markets are overvalued.

There are still other analyses out there that predict that home prices will hold steady and may even increase in the next year.

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