Why America’s housing market is stuck despite more homes for sale

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US homebuyers are confronting a market that appears contradictory. Existing-home sales weakened in July, yet prices remained close to record levels. Mortgage rates are still high enough to restrict what many households can afford, but they are doing something less visible at the same time: discouraging millions of existing homeowners from putting properties on the market.

Existing-home sales fell 1.7% from June in July to a seasonally adjusted annual rate of 4.06 million. The median existing-home sales price reached $434,100, up 2% from a year earlier. June had already set a record median price of $442,800.

Those figures help explain why the current housing slowdown does not look like a conventional correction. Demand has weakened, but supply remains constrained. Many owners purchased or refinanced when mortgage rates were far below current levels, leaving them with little financial incentive to move. The result is a market in which buyers face higher borrowing costs, owners hesitate to sell and limited resale inventory continues to support prices.

Mortgage rates are restricting buyers and sellers at the same time

The average rate on a 30-year fixed mortgage stood at 6.69% in early August, according to Freddie Mac. That is a major change from the borrowing conditions that prevailed for much of the decade before the Federal Reserve began raising interest rates in response to inflation.

The difference can transform the economics of a purchase. For a household financing a $400,000 mortgage, a rate several percentage points higher can add hundreds of dollars to the monthly principal and interest payment. That reduces the size of the mortgage many buyers can qualify for, putting pressure on household budgets even when incomes have risen.

The Federal Reserve has identified mortgage rate lock-in as a factor limiting housing turnover. Most outstanding US mortgages still carry interest rates below 4%, according to the Fed’s July Monetary Policy Report. Selling a home can therefore mean giving up inexpensive financing and replacing it with a loan carrying a much higher rate.

For many households, moving is no longer simply a question of whether another home is desirable. It is a question of whether the change justifies a potentially substantial increase in monthly housing costs.

That creates a feedback loop. High rates reduce buyer purchasing power. Existing owners keep low-rate mortgages. Fewer homes reach the resale market. Limited supply supports prices, which puts additional pressure on affordability.

This helps explain why slower sales have not produced the broad decline in existing-home prices that some buyers expected.

Inventory is improving from the unusually tight conditions seen earlier in the decade, but it remains below pre-pandemic norms. The number of unsold existing homes stood at 1.54 million at the end of July, equivalent to 4.6 months of supply at the current sales pace. Before the pandemic, roughly 2 million existing homes were commonly available for sale.

New construction is becoming a different housing market

Conditions look markedly different for homebuilders. New single-family home sales ran at a seasonally adjusted annual rate of 628,000 in June. There were 485,000 new homes available for sale, representing 9.3 months of supply.

That is roughly twice the months of supply available in the existing-home market. The median new-home sales price was $398,300 in June, down 2.7% from a year earlier. Those figures are not directly comparable with the existing-home median because the properties, locations and mix of transactions differ. They still reveal a major divergence in seller incentives.

A homeowner with a 3% mortgage may be perfectly willing to remain in place. A builder carrying completed inventory has a different calculation. Unsold properties tie up capital, create financing costs and can slow the next stage of development. Builders therefore have stronger incentives to adjust pricing, offer closing-cost assistance, use mortgage-rate incentives or change the mix of homes they produce.

A household focused only on resale listings may see stubborn pricing and limited availability. The same buyer could encounter greater negotiating flexibility in a new development, particularly in markets where builders have accumulated inventory.

Listing data provide another sign that pricing conditions are becoming less uniform. About 20% of homes listed for sale received a price reduction in July, according to Realtor.com, and the national median listing price was down 2.4% from a year earlier.

Those numbers do not conflict with rising median prices for completed existing-home transactions. Asking prices, closed-sale prices and new-home prices measure different parts of the market. Property mix and local conditions can produce very different signals at the same time. For housing executives, lenders and investors, national averages are becoming less useful without that context.

First-time buyers are facing the hardest entry point

The imbalance is especially difficult for households trying to buy their first home.

First-time buyers accounted for 29% of existing-home purchases in July. Historically, that group has represented closer to 40% of sales.

Many current homeowners entered the recent period of higher rates with two advantages: accumulated equity and a low-cost mortgage. First-time buyers generally have neither.

They are more likely to depend on current mortgage rates, current home prices and savings accumulated outside the housing market. Higher rents can make saving for a down payment harder, and elevated borrowing costs can reduce the price range available to them once they are ready to buy.

That distinction matters because lower mortgage rates could improve affordability even without a large decline in home prices. Yet lower rates could create another problem if they release demand faster than they release supply.

The National Association of Realtors has argued that mortgage rates closer to 6% would generate stronger sales activity. That would lower financing costs for buyers, but the impact on inventory is less certain.

Some homeowners could decide that the penalty for replacing a low-rate mortgage has become manageable and list their properties. Others could continue to stay put. At the same time, buyers who postponed purchases could return quickly, creating renewed competition for a limited pool of homes.

This is why the next stage of the housing cycle may depend on more than the direction of mortgage rates. The key question is whether declining rates can unlock enough existing-home supply to meet returning demand.

For builders, the present imbalance creates an opening. For mortgage lenders and real estate brokers, it keeps transaction volumes under pressure. For first-time buyers, it means a lower mortgage rate alone may not solve the affordability problem if inventory remains constrained.

The US housing market does not lack demand for homes. It lacks a straightforward mechanism for bringing enough existing homes back onto the market at prices and financing costs buyers can absorb. Until that changes, lower sales, high prices and growing builder inventory can continue to exist side by side.

Source:
Associated Press