Homebuying demand remains sluggish as buyers stay on sidelines
Existing home sales are on track to hit their lowest level in nearly 30 years, Fannie Mae’s Economic and Strategic Research (ESR) Group said.
Even as mortgage rates fall and housing supply grows in some regions, 2024 will close with the slowest pace of sales since 1995.
Sales still sluggish
While there has been a nearly 20% increase in available homes for sale compared to last year, this has not translated into a significant boost in existing home sales, according to data from the ESR Group.
One major reason for this lag is geographic variation in where homes are available. Areas like the Sun Belt and the Mountain West, which have seen both rapid home price increases and robust new home construction, are experiencing a unique strain. Homebuyers in these regions face a large affordability shock, which is exacerbated by competition from newly constructed homes.
Fannie Mae chief economist Doug Duncan noted the national housing supply shortage still persists despite regional improvements.
"Increasingly, regional variations in housing supply are creating divergent affordability conditions and experiences for consumers on both sides of the home sales transaction," Duncan said. “However, taken as a whole, home sales activity, particularly on the existing side, remains near what we consider to be the floor of basic demographic and household mortgage demand."
He added that certain states have seen supply increases, but national affordability remains a critical issue, especially as regions like the Sun Belt deal with rising insurance costs and a faster pace of new home development.
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Key indicators, such as softening pending home sales and reduced mortgage applications, suggested that affordability issues are still holding back home-purchase demand.
“Although mortgage rates have fallen considerably in recent weeks, we’ve not seen evidence of a corresponding increase in loan application activity, nor has there been an improvement in consumer homebuying sentiment,” Duncan said. “We think it’s likely that many would-be borrowers are waiting for affordability to improve even further, and that some may be anticipating additional declines in mortgage rates given expectations that the Fed will lower the federal funds target rate.
“Others may be waiting for household incomes to improve further to offset some of the recent home price growth, or they may be thinking that future supply growth will ease affordability.”
“The ESR Group believes some combination of easing mortgage rates and soft home price growth relative to income growth in these regions will be needed before existing home sales begin to meaningfully rise,” the group wrote in its report.
Economic growth outlook
While the overall economy is still forecasted to slow down into the end of 2024, Fannie Mae’s ESR Group maintained its growth outlook, noting that incoming economic data has been consistent with expectations.
The Federal Reserve is expected to take a more neutral stance on monetary policy as inflation nears the 2% target. However, the lingering effects of earlier interest rate hikes are likely to keep real GDP growth subdued into 2025.
“Regardless of the lever, we expect affordability to remain the primary constraint on housing activity for the foreseeable future, and we now think full-year 2024 will produce the fewest existing home sales since 1995,” Duncan said.
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