2023 was the worst year for home sales in nearly three decades, as affordability challenges and critically low housing supply kept the market at a standstill.

According to the National Association of Realtors (NAR), existing home sales fell by 19% to 4.09 million—the lowest level since 1995, when the country had 65 million fewer people.

On a monthly basis, sales were down 1% in December to an annual rate of 3.78 million. That was the lowest monthly pace since August 2010.

Existing homes are by far the largest segment of U.S. real estate, accounting for roughly 88% of total sales.

NAR chief economist Lawrence Yun attributed the dismal home sales data to a lack of supply. “We need more inventory to get the market moving,” he said.

In December, there were 1 million units for sale, down 11.5% from November but up 4.2% from a year ago. There’s only 3.2 months of unsold inventory available for purchase, which is well below the 5 to 6 months needed for a healthy market.

“A perfect storm of inflation, high prices, soaring mortgage rates, and low housing supply caused 2023 to go down as the least affordable year for housing in recent history,” said Redfin senior economist Elijah de la Campa.

The lack of housing supply has even landed on the White House’s radar, with the Biden administration vowing to build 500,000 starter homes to help alleviate the affordability crisis.

“Our first major priority is increasing the supply of affordably priced homes in order to lower housing costs,” said Lael Brainard, director of the U.S. National Economic Council.

“We are using every lever at our disposal—legislative proposals, our administrative authorities, our convening power, and our bully pulpit—to do so,” she said.

Experts say 500,000 is only a starting point and that America needs far more housing to alleviate the crisis.

How big is the housing shortage?

The Government Accountability Office, which provides nonpartisan information to Congress, says “shortages of affordable housing are a long-standing challenge” for the U.S.

Depending on who you ask, the actual housing shortage ranges from 3.2 million up to 6.5 million.

The higher figure is based on research from Realtor.com, which calculated the gap in single-family home constructions between 2012 and 2022. If America prioritizes multi-family units, the gap could fall to 2.3 million, the real estate listing website said.

The problem is that multi-family units like condos, townhouses, and apartment buildings take an average of 15 months to complete, which drags out the timeline for addressing shortages, according to Realtor.com economic analyst Hannah Jones.

By comparison, it usually takes about seven months to build a single home, if we factor permits and actual construction.

Because supply is so limited, existing homeowners have been able to make money in a depressed market. As the NAR data showed, 85 million homeowners saw the value of their properties rise in 2023, even as sales and market activity plummeted.

What about mortgage rates?

One of the main reasons why the housing supply remains so low is that people are unwilling to put their properties up for sale. That's because they don't want to refinance at a much higher rate.

The good news is that mortgage rates have already declined from last year’s highs and are expected to fall even further in 2024.

A sustained drop in rates should ease market conditions because “There’s so much latent demand in the market,” according to Sam Khater, chief economist at Freddie Mac.

“You have a lot of folks that are still trying to get up on the first rung of the housing ladder,” and they will look to do so when mortgages become more affordable, he said.

“There’s just a lot of pent-up demand,” said Lisa Sturtevant, chief economist at Bright MLS, a real-estate listings database. “There’s a lot of people out there who are still waiting to get into the market, and they’re making it work however they can.”