If existing home sales were a baseball player, it would be hitting below the Mendoza line (look it up). And it appears to be stuck in its slump, at least until mortgage rates fall a little further.
Right now, says Odeta Kushi, deputy chief economist at First American, the existing home sector “hangs in a delicate balancing act.”
While lower rates and improving affordability are pulling some buyers back into the market, Kushi explains, the rate lock-in effect, labor market dynamics, and cooling inventory growth continue to dampen home sales.
“Until these opposing forces swing further in favor of greater market activity, existing-home sales are likely to remain well below their historical norm,” she warns.
If existing-home sales were keeping pace with the historical pre-pandemic average ratio of sales to households — FirstAm’s benchmark for a “normal’ market” — they would be running at an annualized rate of about 5.4 million sales. Instead, sales are hovering near 4 million.
One of the factors holding back the market is the so-called “lock-in effect,” Kushi says. Moving often means trading in relatively low monthly mortgage payments for higher ones, even for the same loan amount.
Rates that averaged around 4% during the pandemic are now about 6.3%, effectively freezing many would-be sellers in place, slowing the turnover of existing homes and prolonging the housing market’s slump, the economist pointed out.
The softening labor market is another drag on the housing market. While unemployment remains historically low, the FirstAm analysis pointed out, the job hiring rate has fallen to levels last seen in 2013, when unemployment was 7 percent.
Job changes often trigger household moves, so when fewer people are switching jobs, there is less incentive to relocate, reducing both buying and selling activity. A softening labor market also fuels greater economic uncertainty, which discourages buyers and may prompt them to pull back from making the biggest financial decision of their lives.
On the supply side, inventory is higher than a year ago, giving buyers more options. However, the pace of inventory growth is slowing, and supply nationally remains tight by historical standards.
“More inventory is essential to breaking the housing market slump — after all, you can’t buy what’s not for sale,” says Kushi.
But in August, inventory was 21 percent lower than the 2015–2019 average for the same month. That gap was smaller in July and June, signaling, the economist noted, that the rebound in supply is stalling.
Weekly data through September shows a deceleration in the year-over-year growth of both active and new listings, while elevated listing withdrawals, when sellers take their homes off the market, all suggesting that “hesitant sellers are waiting for better conditions,” Kushi said.
Looking ahead, the FirstAm economist said that with rates recently hitting an 11-month low, there are signs that the market is starting to awaken. “Slower home price growth combined with lower rates means affordability is gradually improving,” Kushi said, “opening the door for some sidelined buyers — and even triggering some sellers to re-enter the market.”
