Decline in U.S. Second-Hand Home Sales

In January, a surprising downturn in the U.S. housing market put a halt to what had been a streak of three consecutive months of rising sales of existing homes. The culprits behind this decline are the persistently high mortgage rates and ongoing increases in home prices. These two influential factors act as heavy chains that significantly dampen buyer demand, making homeownership seem increasingly unattainable.

According to the National Association of Realtors (NAR), newly released data indicated a noteworthy 4.9% month-over-month drop in existing home sales for January. After seasonal adjustments, the annualized sales volume plummeted to 4.08 million units. This number fell short of market expectations, as economists had largely predicted a drop to around 4.12 million units after polling, highlighting the increasing uncertainty that shrouds the housing market.

An in-depth look at the January sales figures reveals that they primarily reflect the contracts signed in November and December of 2022. Data from Freddie Mac, a key player in the mortgage finance sector, indicates that the average rate for a 30-year fixed mortgage rose from 6.72% at the end of October to 6.85% by the end of December. This upward trend in interest rates is undoubtedly a significant hurdle for prospective home buyers. As housing costs skyrocket, many potential buyers can only look on wistfully, contributing to the demand stagnation. Although there was a 2.0% increase in January's existing home sales compared to the same month last year, this slight rise seems lackluster against the backdrop of elevated mortgage rates and home prices.

NAR's chief economist, Lawrence Yun, offered insightful commentary on the situation: "Despite the Federal Reserve's multiple cuts to short-term interest rates, mortgage rates have remained stubbornly high in recent months. Coupled with elevated home prices, housing affordability remains a critical challenge facing the market today." Indeed, since September of the previous year, the Federal Reserve has slashed interest rates by 100 basis points, yet mortgage rates have not reduced as many had anticipated. This disconnect can largely be attributed to the rising yields on U.S. ten-year Treasury bonds. With the U.S. economy exhibiting robust resilience amid persistent inflation issues, yields have remained elevated, keeping mortgage rates aloft. Even as market participants eagerly await interest rate cuts, the majority of economists contend that the Fed will probably reduce rates just once this year—or perhaps not at all. Additionally, attention is focused on a suite of potential policy adjustments from the U.S. government, including changes to tariffs, tax cuts, and large-scale deportations of undocumented immigrants. Such measures could exacerbate inflationary pressures, leading to lasting impacts on interest rate trends.

In the January housing market, there was a slight improvement in inventory availability. Home inventories increased by 3.5% month-over-month, totaling 1.18 million units, which translates to a striking 16.8% rise year-over-year. This indicates that buyers are beginning to encounter a larger selection of homes available for purchase, potentially providing more chances to find their ideal property. However, this increase in inventory has not translated to a decrease in prices; rather, home prices continued to climb. The median price of existing homes in January reached $396,900, marking a 4.8% increase from the same time last year. Based on the current sales pace, the market would require approximately 3.5 months to absorb the existing inventory—up from 3 months last year but significantly below the balanced supply level of 4 to 7 months. Thus, while there is an uptick in available housing, the imbalance between supply and demand persists.

Examining other dimensions of home sales, the average time that homes remained on the market in January rose to 41 days, up from 36 days in the same period last year, marking the longest duration since January 2020. This suggests a noticeable decline in market activity, making transactions more challenging. First-time homebuyers accounted for 28% of total sales, approximately equal to last year’s figures. Economists and real estate agents generally believe that a healthy housing market should see first-time buyers making up 40% of sales. The current proportion indicates significant challenges in attracting newcomers to the market.

When looking at the payment methods for home purchases, cash transactions comprised 29% of sales in January, down from 32% last year. This decline likely indicates the increasing financial burdens on buyers and a pervasive sense of market uncertainty. Moreover, distressed properties, including foreclosures and short sales, climbed to a share of 3%—a figure that has typically lingered around 2% in recent years. This uptick signals potential financial strains in the market, as some homeowners may be compelled to sell due to economic difficulties.

Overall, the January downturn in the existing home market starkly illustrates the ongoing pressure that high interest rates exert on housing demand. The future trajectory of the market remains closely intertwined with Federal Reserve monetary policy adjustments. Only when rates decline, subsequently lowering the cost of homeownership, can it be expected that more buyers will reenter the market, thereby fostering improved supply-demand dynamics and facilitating the healthy evolution of the second-hand housing market.