US existing home sales – what's going on?

The tight housing market saw existing-home sales dwindle to a 4.07 million annual rate in July as market conditions remained unfavorable to would-be buyers.

Sales of previously occupied homes dropped 2.2% month over month and 16.6% year over year to a seasonally adjusted annual rate of 4.07 million in July, the National Association of Realtors reported Tuesday.

According to NAR chief economist Lawrence Yun, two factors are driving current sales activity: Housing inventory and mortgage rates.

“Unfortunately, both have been unfavorable to buyers,” Yun said.

While the supply of available homes for sale remained historically low, unsold inventory was up 3.7% from June to 1.11 million units in July. This represents a 3.3-month supply at the current sales pace, an improvement from 3.1 months in June and 3.2 months a year ago.

Mortgage rates also weighed on potential homebuyers, with the average 30-year fixed-rate mortgage surpassing the 7% threshold. As of August 17, the benchmark mortgage rate jumped to 7.09% from 6.96% the prior week, according to Freddie Mac.

“Mortgage rates have risen substantially since the spring of 2022, and higher rates have a dual impact on sales – pricing out buyers who lose purchasing power and keeping some potential sellers rate-locked in,” First American chief economist Mark Fleming commented.

According to Fleming, over 90% of homeowners who refinanced during the pandemic have locked in a mortgage rate below 6%.

“As mortgage rates return to a not-so-new-normal of over 6%, those homeowners have a financial disincentive from selling, keeping a lid on the primary source of housing supply, and you can’t buy what’s not for sale,” Fleming explained.

Read more: Housing sentiment lags behind economic optimism

Still, recent rate increases combined with high home prices continued to discourage many potential buyers. The median price of existing homes rose 1.9% annually to $406,700 in July.

“Most homeowners continue to enjoy large wealth gains from recent years with little concern about home price declines,” Yun said. “However, many renters are concerned as they’re facing growing affordability challenges because of high interest rates.”

The good news, Fleming said, is that “home sales have likely already bottomed, and the pace of sales will begin to settle into a new normal below the breakneck pace of 2020 and 2021, but also not as low as earlier this year. The hope is that affordability will improve in the second half of 2023 so that the pace of sales can be not too hot, not too cold, but just right.”

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