Home Sales Hit 14-Year Low as Prices Remain Stubbornly High

For the second consecutive month, the drop in home resales has highlighted the deepening downturn in residential investment, which includes house construction. The housing market has been unable to recover from the setback caused by the sharp rise in mortgage rates earlier this spring.

While there has been some improvement in the number of homes available, affordable houses for first-time buyers are still hard to come by across most parts of the country. This scarcity keeps home prices high, making them inaccessible for many looking to purchase their first home.

“Lowering interest rates further and introducing more purchasing options are necessary to attract buyers again,” remarked Jennifer Lee, a senior economist at BMO Capital Markets.

The recent figures likely reflect housing contracts that were signed one to two months earlier, during a period of particularly high mortgage rates.

Year-over-year, home resales, which make up a significant share of U.S. housing transactions, fell by 3.5% in September. The South saw a 1.7% drop, partly due to the impact of Hurricane Helene in Florida. The aftermath of Hurricane Milton, which hit just weeks later, suggests that sales in Florida might continue to suffer.

While the Northeast and Midwest also saw declines, the West experienced an uptick in sales activities.

After the Federal Reserve started reducing interest rates last month, mortgage rates initially fell. However, they have climbed over the past three weeks as strong economic indicators, such as retail sales and the annual adjustments to national accounts, have led traders to scale back their expectations for a further 50-basis-point reduction next month.

The average rate for a 30-year fixed mortgage was 6.44% last week. Although this is up from 6.08% at the end of September, it remains significantly lower than the 7.63% rate seen a year earlier, according to data from Freddie Mac.

Last week’s government data indicated only a slight rise in single-family building permits in September, suggesting that potential homebuyers are waiting on the sidelines in hopes of lower borrowing costs.

Wall Street stocks were trading lower, the U.S. dollar strengthened against other major currencies, and U.S. Treasury prices dropped, sending the yield on the benchmark 10-year note to a three-month peak.

Expanding Housing Inventory

The National Association of Realtors (NAR) speculated that the uncertainty surrounding the upcoming Nov. 5 U.S. presidential election might be causing potential homeowners to hesitate, although there is no concrete evidence to suggest that the election is directly affecting buying decisions.

Residential investment had a negative impact on the gross domestic product in the second quarter. However, growth projections for the third quarter are optimistic, with estimates reaching as high as a 3.4% rate. The economy expanded at a 3.0% pace in the previous April-June quarter.

“Given the recent rise in mortgage rates, a widespread recovery in the residential housing market may take longer than initially anticipated,” stated Christopher Rupkey, chief economist at FWDBONDS.

Last month, housing inventory rose by 1.5% to 1.39 million units, the highest level since October 2020. Inventory has surged 23.0% compared to one year ago. However, it remains below the pre-COVID-19 pandemic level of 1.8 million units.

Despite the increased inventory, the median price of an existing home climbed 3.0% year-over-year to $404,500 in September, setting a record for the month. Prices rose in all four U.S. regions, with about 20% of homes selling above their listed price.

At the current sales rate, it would take 4.3 months to deplete the existing home inventory, the longest duration since May 2020 and up from 3.4 months a year earlier. A balanced market typically has a four-to-seven-month supply.

Homes remained on the market for an average of 28 days in September, up from 21 days the previous year. First-time buyers made up 26% of home sales, slightly down from 27% last year.

This proportion is still below the 40% considered necessary for a healthy housing market. All-cash purchases accounted for 30% of all transactions, slightly up from 29% last year. Distressed sales, including foreclosures, remained steady at 2% of the market.