The housing market is stuck in a slump as existing-home sales fell 2.2% in July from the previous month to 4.07 million, according to the National Association of Realtors (NAR).

July marks the fourth consecutive monthly drop, surpassing consensus estimates and confirming the downtrend is evident for most of this year.

Sales currently stand 16.6% below last July and are on par with the trough of May 2020 when the country was under the nationwide lockdown.

The NAR said a lack of available homes underlies slowing sales. At the same time, demand remains clipped by affordability issues due to high interest rates and record prices.

"Two factors are driving current sales activity – inventory availability and mortgage rates," said NAR Chief Economist Lawrence Yun. "Unfortunately, both have been unfavorable to buyers."

Demand drag and constrained supply

With fewer Americans moving house and no sign of the pent-up demand, realtors keep a close eye on inventories in hopes of any turnaround in sales.

July saw a total housing inventory of 1.11 million units, up 3.7% from June but down 14.6% from July last year. Supply remains cramped, although there was no further drop.

Last month, the NAR claimed the market could easily absorb double the current inventory level.

At the current pace, unsold inventory for July would last for 3.3 months, up slightly from 3.1 months in June. A rate between 4 and 7 months typically indicates the market is balanced.

Sky-high mortgage rates

While the weak housing supply hitting the market has done little to help sales, demand factors present an additional drag.

Mortgage rates are a real problem because homeowners don't want to move when the cost of borrowing is so high.

Freddie Mac announced last week that 30-year mortgage rates are at the highest in over 20 years at 7.09% as the economy keeps performing better than expected.

Economists have also been warning rates could go higher yet, particularly after retail sales surprised on the upside last week.

That was one of many recent indicators suggesting the economy is still growing, and further hikes may be needed to get inflation down to the Fed's 2% target.

The 30-year mortgage rate is "at a critical stage", The NAR's Yun said last week. If the rate broke above 7.2%, he stated, it would likely be heading for the 8% mark.

An issue of affordability

Recent headlines of higher house prices further contribute to the slower housing market.

Combined with higher mortgage rates, higher prices compound the affordability issue for buyers, holding them back from upsizing or moving out of rentals.

Last week, Goldman Sachs' housing analysts reportedly flipped their expected 2.2% fall for 2023 home prices, going for an increase of 1.8% instead.

Prices will pick up further next year, they said, rising 3.5% in 2024 in contrast to their previous 2.8% forecast.

Late last month, the May S&P Case-Shiller Index saw its third straight monthly increase, showing home price gains across the nation.

Having been on the slide since May 2022, S&P said the numbers supported its view that home prices stopped declining in January 2023.

Redfin also said earlier this month that the average mortgage payment is hovering near record highs—up nearly 20% compared to last year's $2,605.

"Most homeowners continue to enjoy large wealth gains from recent years with little concern about home price declines," Yun said in the report.

"However, many renters are concerned as they're facing growing affordability challenges because of high interest rates."

Housing is key for the rate agenda

Sickly existing homes sales—which account for the lion's share of transactions—stand in contrast to newly constructed units which have climbed steadily in 2023.

New home sales posted a 15-month high in May before dropping back slightly in June.

Today's data—combined with the July reading for new home sales—will give the Fed something to chew on at Jackson Hole's economic symposium before their upcoming rate-setting meeting.

With market pressure evident on both the demand and supply side, realtors will eagerly look for any cues of a slowdown in rate hikes to shake off the sales slump.