The National Association of Realtors reported September’s data for existing home sales this week and the figure came in at the lowest level since October 2010. Existing home sales fell 1% in September to an annual rate of 3.84 million, year over year sales are down 3.5% since September 2023. This was right on par with analyst expectations for the monthly change.
There are several economic factors that are currently causing buyers to be hesitant. High borrowing costs, inflated home prices, and the uncertainty of the upcoming election, have many potential homebuyers sitting on the sidelines because they feel that it is a bad time to be buying homes. The median home price in September increased 3% from the same time last year, September 2024’s price was $404,500. This is the highest price ever recorded for a September. Home prices are currently up about 50% from the same time five years ago. Supply and demand dynamics have also played a huge role in the increase in housing prices. Supply still remains low, meaning demand has been pushing prices to extreme highs. The last housing starts economic report showed that builders are currently hesitant to start building new houses, and will be until they see the positive effects of lower interest rates. Supply is also low because people who locked in mortgages when rates were below 4% have no incentive to move now that rates are far higher.
Due to inflation and subsequently higher interest rates, the cost of borrowing for a mortgage is almost at 7%, and has been rather sticky above 6%. This is a solid decrease from the post-pandemic highs, but still represents an extreme increase in the cost of financing a home, deterring many buyers from buying houses. Many buyers are waiting to see what the Fed’s decision regarding interest rate cuts will be in their November meeting. If the Fed decides to move forward with rate cuts, mortgage rates should see a large decrease, making home financing far more affordable. The Fed doesn’t set mortgage rates, but their decision regarding benchmark interest rates have great influence over mortgage rate movements. The hesitancy is especially easy to see among first time homebuyers. In September, first-time buyers accounted for 26% of home sales nationwide, this is the lowest level since fall 2021.
The upcoming election is another reason for the decrease in buying. Whether or not the results will drastically affect the housing market, buyers don’t want to make large financial decisions right before a major presidential election. The election is just another factor causing uncertainty among investors and consumers. Neither investors nor consumers are comfortable putting capital to work with such an event coming up. This has been clear as day in the recent data for housing sales and housing starts.
That being said, there is a good chance that this is a bottoming in home sales as there are reasons that the future could bode well for the housing market. Lawrence Yun, chief economist of the National Association of Realtors, said, “Home sales have been essentially stuck at around a four-million-unit pace for the past 12 months, but factors usually associated with higher home sales are developing,” As the Federal Reserve continues to cut interest rates three things will happen. First, borrowing costs will decrease causing more buyers to enter the market. Second, builders will be more willing to start new projects, increasing the home supply and driving prices down. Third, lower interest rates will make it more affordable to move, more people moving causes home home supply to increase. These dynamics should have a huge, beneficial impact on the health of the housing market. Both supply and demand will increase while the costs of buying and building will decrease. These effects may take a few months to be seen as the positive effects of lower interest rates make their way through the economy.
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