To say it’s been a bad 12 months for home sales would be a massive understatement.
Today, the National Association of Realtors (NAR) reported that existing home sales fell to the lowest level in nearly 30 years last month.
So if you’re wondering if something broke after the Fed raised rates 11 times, look no further than the residential housing market.
Per NAR, existing-home sales declined to an annual rate of 4.06 million in December, the lowest total since 1995.
For perspective, many real estate agents today weren’t even born in 1995, nor were the loan originators who helped buyers obtain the mortgages.
What’s Behind the Drop in Home Sales?
While home sales actually ticked up to close out 2024, the annual volume was pretty abysmal and the worst since the mid-1990s.
Driving the lack of home sales has been two main things. A lack of for-sale inventory and a lack of affordability.
And one could argue that mortgage rates are behind a lot of it, whether it’s mortgage rate lock-in causing homeowners to stay put.
Or the record low mortgage rates seen in 2021, leading to investors and others gobbling up what little was out there and refusing to let go.
Now that 30-year fixed mortgage rates are around 7%, it has become unaffordable for new buyers to enter the fray.
NAR noted that completed transactions, which include single-family homes, townhomes, condominiums and co-ops, rose 2.2% from November and 9.3% from December 2023.
That was the third month of year-over-year gains, but still not enough to bring the annual total up by any meaningful degree.
Granted, the annual rate did surpass four million, barely, so it could have been worse I suppose. But it certainly wasn’t good.
NAR revealed that total housing inventory as of the end of December stood at just 1.15 million units, down a sizable 13.5% from November but up 16.2% from one year ago (990k).
That meant unsold inventory at the current sales pace was just a 3.3-month supply, down from 3.8 months in November and up marginally from 3.1 months in December 2023.
Home Prices Continue to Go Up Despite Sales Crash
As we all know, home prices are driven by supply and demand. When there is less of something available, the price goes up, assuming there is more demand than supply.
While demand has been muted as well because of a lack of affordability, it’s still not weak enough to offset additional home price gains in most markets, hence the nationwide appreciation numbers.
Speaking of, the median price of an existing home climbed to a record high of $407,500 in 2024, up a hefty 6.0% from a year ago when it was $381,400.
And it wasn’t just driven by the Northeast or another hot area of the country. All four U.S. regions posted YoY price increases.
The Northeast was strongest with home prices up 11.8% from last year, followed by the Midwest (+9.0%), the West (+6.0%), and the South (+3.4%).
Many folks believe there is an inverse relationship between home prices and mortgage rates, but it’s really a sales relationship.
When mortgage rates are lower, transactions are higher. But when rates rise, you see home sales slow.
That doesn’t mean home prices go down though. They can and will continue to rise so long as supply doesn’t stack up.
Generally, anywhere from 4-5 months of supply is considered a healthy, balanced housing market.
We continue to see supply in the 3-month range, which simply isn’t enough, though it does prevent home prices from falling.
Why It’s Good to See Home Sales Slow Down
While lower home sales are obviously bad news for a number of reasons, namely that the economy is often driven by real estate, there is one positive.
We know housing affordability today has rarely been worse outside the 1980s (remember the double-digit mortgage rates?).
Home buying conditions are currently less favorable than what we saw at the height of the housing boom in 2006.
Back then, the national payment-to-income ratio topped out at 33.9%, per ICE. As of November, it was an even higher 35.3%.
Much of it has been driven by significantly higher mortgage rates, which climbed from around 3% to as high as 8% in 2023 before easing to roughly 7% currently.
As noted, home prices have continued to rise despite this, albeit at a slower pace.
The combination of a higher asking price coupled with a mortgage rate that is more than double what it once was has been a one-two punch.
However, the market has responded appropriately. Back in 2006, the home sales kept on chugging and chugging.
Why? Because we had absolutely no guardrails in the mortgage world. Instead, we adapted by offering riskier and riskier loan products, along with stated income and no-doc underwriting.
Today, much of that is gone thanks to changes made after the early 2000s mortgage crisis.
You can thank the ATR/QM rule for eliminating a lot of that stuff, which has made today’s housing market much sounder.
Sure, home sales will continue to suffer, but at least we don’t have new loans and homes going to people who can’t afford them.
Read on: Housing market risk factors are a lot different today.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
