U.S. home sales dropped to their lowest level since 2010, with the real estate market facing continued pressure from high mortgage rates and stagnant property prices. The National Association of Realtors (NAR) reported last Wednesday, existing home sales fell 1% from August to September, totaling 3.84 million units on a seasonally adjusted annual rate. This slump marks the slowest pace since the aftermath of the Great Financial Crisis, as buyers remain hesitant amid rising borrowing costs.
September's data highlighted the second consecutive monthly decline, reinforcing concerns from economists about the broader challenges facing the housing market. Despite improved inventory conditions, entry-level homes remain scarce, making it difficult for first-time buyers to enter the market. According to Jennifer Lee, a senior economist at BMO Capital Markets, the environment will not see improvement until "more rate cuts and more options" are available to re-engage buyers.
The slowdown has sparked worries about residential investment, which includes homebuilding, as growth estimates for the U.S. economy were anticipated at around 3.4% for the third quarter. This marks yet another dampening of momentum on the heels of last year's sluggish housing activity. Concurrently, the Fed has responded to the market's challenges by cutting rates, hoping to create more favorable borrowing conditions for buyers.
Yet, even with the potential easing of rates, the prospect of them dropping significantly remains uncertain. The average rate for the 30-year fixed mortgage has recently fluctuated around 6.44%, up from 6.08% by the end of September. This is problematic for many current homeowners who secured lower rates previously, as moving could result in higher monthly payments due to the rising rates, creating what's referred to as the "lock-in effect." The Association's chief economist, Lawrence Yun, pointed out, "Those who locked in lower rates are less likely to sell now and take on higher debt." This trend restricts inventory and places significant upward pressure on prices.
Despite these challenges, the inventory of homes has seen some improvement, climbing by 1.5% to 1.39 million units, representing the highest level since October 2020. Year-on-year, this reflects a remarkable 23% increase. Despite this growth, current supply is still below the pre-pandemic levels of around 1.8 million units, leaving many buyers with limited choices. Home prices, meanwhile, continue to rise, with the median existing home price hitting $404,500, up 3% from one year ago. This not only suggests resilience but indicates underlying inflationary pressures within the housing market, as rising costs across various sectors compound the affordability crisis.
The geographical breakdown of the sales trend presents interesting dynamics. Sales declined across three out of four major regions; the Northeast experienced the sharpest drop at 4.2%, followed closely by declines of 2.2% in the Midwest and 1.7% in the South. Conversely, the West saw a bit of good news, with sales climbing 4.1%. Though this slight uptick provides hope, the broader picture remains bleak as the industry grapples with severe affordability challenges largely unaffordable for many prospective buyers.
Real estate stakeholders recognize the urgency of the situation as distressed properties represent only 2% of transactions, showcasing the low mortgage delinquency rates. Lower-than-expected sales activity has led many economists and real estate professionals to adjust their expectations for the remainder of the year and even next year. A mixed bag of lower spending power, high inflation, and uncertainty due to the impending U.S. presidential elections are complicators for potential buyers waiting on the sidelines.
First-time buyers accounted for 26% of sales this past month, still shy of the minimum 40% deemed necessary for healthy market activity. Their struggle to gather enough cash for down payments—exacerbated by rising costs—hinders their participation and reinforces the market’s stagnation. These potential buyers need properties within the price range of $250,000-$500,000; unfortunately, such options have become increasingly difficult to find.
Real estate agents indicated homes typically lingered on the market for about 28 days, indicating growing buyer hesitance and increased negotiation power—a shift from the frantic pace prior years. Interestingly, as the inventory continues to improve and mortgage rates rise and fall, the delicate balance between buyers and sellers may evolve. The future appears especially dependent on housing demand dynamics and the expected economic climate and policy decisions from both local and federal levels.
Overall, the current state of the U.S. real estate market paints a complicated picture, with home sales stalling at 14-year lows and impacts evident across buyers, sellers, and the economy at large. Until significant changes—like more aggressive interest rate cuts—take place, optimistic recovery appears distant.
