Existing Home Sales Decline Amid Rising Mortgage Rates

Sales of previously owned homes dropped more than anticipated, even as inventory levels climbed. This decline is largely attributed to rising mortgage rates that have continued to dampen buyer activity.

The National Association of Realtors reported on Tuesday that existing home sales fell by 2.7% from May, bringing the seasonally adjusted annual rate down to 3.9 million. This figure is one of the weakest monthly readings in over ten years, falling short of economists’ expectations for only a 0.7% decrease. Sales remained unchanged compared to the same time last year.

The report reflects transactions typically finalized in April and May, a period when the average rate for a 30-year fixed mortgage exceeded 7% multiple times. Currently, the rate stands at 6.77%, nearing the high from the past year.

Even though sales have slowed, home prices are still on the rise. The median price for existing homes reached a record high of $435,300 in June, marking a 2% increase from a year ago and continuing a 24-month streak of annual price growth.

By the end of June, total housing inventory hit 1.53 million units, reflecting a 15.9% increase from the previous year. This amount of inventory corresponds to a supply of 4.7 months at the current sales pace; a six-month supply is generally seen as a balanced market.

While the growing inventory suggests some easing, the market remains challenging for first-time low-income buyers. Sales of homes priced under $100,000 dropped by 5% year-on-year, whereas sales for homes above $1 million increased by 14%. The proportion of first-time buyers has stayed at 30%, which is below the long-term average of 40%. Full-speed purchases accounted for 29% of transactions.

Homes are taking longer to sell, with the average time on the market in June extending to 27 days before going under contract, compared to 22 days at this time last year. Additionally, listings received an average of 2.4 offers, which is down from 2.9 a year ago.

Economists have pointed to high mortgage rates driven by the Federal Reserve’s strict policy as a key obstacle in the housing market. While job growth and rising incomes are helping bolster consumer demand, affordability issues continue to pose significant challenges for many buyers.

Market analysts indicate that substantial increases in sales may hinge on a decrease in borrowing costs. Some forecasts anticipate lower prices by the end of the year if inflation eases and the Federal Reserve begins to lower interest rates.

Former President Donald Trump has continuously urged the Federal Reserve to cut interest rates, arguing that high borrowing costs are limiting access for homeowners and hindering overall economic growth.

The housing market remains exceedingly sensitive to changes in interest rates. Existing homeowners are reluctant to sell and give up their low-rate mortgages, while buyers are experiencing a decline in purchasing power. Consequently, even with sustained demand, the turnover rates remain low.