Existing home sales on track for their worst year since 1992
U.S. existing home sales fell for a fifth consecutive month in October and are on track for their worst year in decades, as elevated mortgage rates and a lack of supply kept buyers on the sidelines.
According to the National Association of Realtors (NAR), existing home sales fell by 4.1% to an annual pace of 3.79 million units—the weakest since 2010, just after the subprime mortgage crisis. The nation also had 26 million fewer people at the time.
On a 12-month basis, sales were down a whopping 14.6% in October.
Barring a miracle rebound in November and December, existing home sales are on track for their worst year since 1992.
“Prospective home buyers experienced another difficult month due to the persistent lack of housing inventory and the highest mortgage rates in a generation,” said NAR chief economist Lawrence Yun.
While housing inventories grew slightly in October—up 1.8% to 1.15 million units—they were down 5.7% from a year ago. At the current sales pace, only 3.6 months’ worth of homes are available on the market.
However, buyers are still competing for whatever is available, leading to multiple offers, “especially on starter and mid-priced homes,” Yun said. That competition pushed average home prices up 3.4% to $391,800, marking the fourth consecutive year-over-year increase.
With prices still hovering near record highs, why are existing homeowners sitting on the sidelines? They are simply waiting for mortgage rates to drop.
A frozen market
The average homeowner has seen the value of their property grow by more than $100,000 in just three years. But they’re afraid to cash in because they don’t want to trade their current mortgage rate for a much higher one.
According to Realtor.com, nearly 82% of homeowners feel “locked in” by their current mortgage rate, which is likely in the 3-4% range (and even lower in some cases).
This so-called “golden handcuffs” phenomenon has crippled the housing market and contributed to the worsening affordability gap.
“The combination of high prices, high mortgage rates, and millions of homeowners unwilling to move, given they've locked in low rates, has frozen the market,” said Robert Frick, an economist at Navy Federal Credit Union.
“Many people have decided to sit on the sidelines—'Let's stay in our home for now; we can save up our money for a higher down payment down the road,'” Gino Tozzi, a real estate consultant with Realcomp, told Axios.
At what point do homeowners break free from their golden handcuffs? The tipping point is when mortgage rates fall below 5%, according to a recent report from real estate marketplace Zillow.
Current homeowners are almost twice as likely to sell their home if their mortgage rate is 5% or higher.
Mortgage rates remain elevated
Mortgage rates have declined for three consecutive weeks but remain well above Zillow’s tipping point. According to Freddie Mac, the average 30-year rate reached 7.44% last week—more than doubling in the last two years.
To help spark a recovery in the housing market, industry heavyweights, including the Mortgage Bankers Association, National Association of Home Builders, and NAR, have called on the Fed to bring down the borrowing costs or “signal its intent that it will not raise interest rates further.”
They may get their wish, but mortgage rates are unlikely to decline substantially in the near future.
Goldman Sachs analysts Roger Ashworth and Vinay Viswanathan predict that the 30-year rate will be 7.1% by the end of 2024 and 6.6% by the end of 2025. That’s a far cry from the 3-4% levels homebuyers enjoyed in the decade following the financial crisis.