Home sales in July took a drastic hit due to the surge in mortgage rates, deterring both homeowners and buyers. Unfortunately, the outlook for August doesn’t appear any more promising.
According to the National Association of Realtors, existing homes were sold at a seasonally-adjusted annual rate of 4.07 million in July—a significant 2.2% decline from the previous month and a worrisome 16.6% drop compared to the same period last year. These figures mark the lowest rate since January when sales plummeted to 4 million.
Although economists had predicted a decline, they did not anticipate such a substantial downturn. The FactSet consensus estimates foresaw a more modest drop to 4.15 million homes from June’s 4.16 million.
The decline in sales can be attributed to the steady rise in mortgage rates during the summer. Freddie Mac’s weekly measure of the average 30-year mortgage rate displayed a starting and ending point of 6.81% in June—an alarming increase compared to the historically low rates observed earlier in the pandemic and the mid-6% rates witnessed at the beginning of this year. The surge in mortgage rates towards the end of 2022 caused a decline in demand and subsequently reduced supply.
Lawrence Yun, the chief economist for the trade group, shed light on the contributing factors behind the current sales slump, stating, “Two factors are driving current sales activity – inventory availability and mortgage rates.” Unfortunately, both factors have been unfavorable for buyers. The data reveals that there were only 1.11 million homes available for sale in July—the lowest inventory number for July since at least 1999 when the trade group started monitoring existing home data. Yun emphasized these points during a recent call.
While the housing market continues to grapple with these challenges, industry experts are keeping a close eye on how the situation unfolds in the coming months.
Home Prices Rise for the First Time in Months
The housing market is showing signs of improvement as home prices surpass levels seen a year ago. In July, the median home sold for $406,700, representing a nearly 2% increase compared to the same month in 2022. This rise in prices can be attributed to the low inventory of homes available for sale.
According to experts, sales of higher-priced homes fared better than lower-priced homes, contributing to the overall increase in prices from the previous year. Despite concerns about a sluggish market for existing-homes, homeowners who are content with staying put should not worry. With strong prices and relatively low supply, home equity reached a staggering $16 trillion in June, as reported by Black Knight earlier this month.
On the other hand, renters may be facing growing affordability challenges due to high interest rates. While homeowners continue to enjoy significant wealth gains from recent years, renters are feeling the impact of rising interest rates.
Unfortunately, prospective buyers looking to enter the market may encounter further difficulties. Freddie Mac’s weekly measurement of the average 30-year fixed mortgage rate rose to its highest level since 2002 last week. Additionally, the 10-year Treasury yield, which often influences mortgage rates, remains high. In fact, the yield on Monday reached its highest level since November 2007.
Considering these factors, it seems that relief for buyers and renters may not come anytime soon. Mortgage News Daily reported Monday’s 30-year fixed rate at 7.48%, up 0.11 percentage point from Friday.
In conclusion, while homeowners continue to benefit from rising home prices and strong equity gains, many renters face affordability challenges due to high interest rates. Prospective buyers should be aware of the current market conditions, including increasing mortgage rates and the impact of the 10-year Treasury yield.
The Challenge of High Mortgage Rates and Home Prices
The current real estate market is facing significant challenges due to higher mortgage rates and still-strong home prices. This situation has put pressure on prospective buyers, making it more difficult for them to afford a home.
According to Yun, an industry expert interviewed last week, achieving the level of home affordability that existed before the pandemic would require a dramatic increase in incomes. This would need to be accompanied by a decrease in both mortgage rates and home prices. However, Yun describes this scenario as highly unlikely.
While economists continue to monitor the situation closely, the prospect of returning to pre-pandemic levels of affordability seems uncertain at this time.