LOS ANGELES — The ongoing challenges in the U.S. housing market have become increasingly clear, with the sales of previously owned homes reaching levels not seen in nearly three decades. For the second consecutive year, home sales declined, as a combination of high mortgage rates, a prolonged shortage of housing inventory, and record-high prices created significant barriers for many potential buyers, particularly those looking to purchase their first home.
According to the National Association of Realtors, existing home sales fell by 0.7% last year to approximately 4.06 million, marking the weakest performance since 1995. Moreover, this figure barely surpasses the poor sales results from the previous year. Despite the decrease in sales, the lack of homes for sale coupled with rising mortgage costs provided sellers with a competitive edge, driving the national median home price to an unprecedented $407,500, reflecting a 4.7% increase from the previous year.
Lawrence Yun, chief economist at the NAR, questioned the implications of this downturn, especially considering the U.S. population has grown by over 70 million since 1995. He pointed out the affordability crisis as a major factor, highlighting how skyrocketing home prices and elevated mortgage rates, along with limited housing options, have inhibited buyer access to the market.
The decline in home sales has roots in the trends that began in 2022 when mortgage rates started to rise following the lows seen during the pandemic. The typical 30-year mortgage rate reached a peak of nearly 8% in October 2023, briefly dropping to a two-year low the following September, but has predominantly remained around the 7% mark, according to Freddie Mac.
Consequently, many potential buyers have found their purchasing power significantly diminished due to the higher costs associated with borrowing for homes that have sharply increased in value. As of the end of December, the available housing inventory was a mere 1.15 million homes, which, while a 16.2% increase from the previous year, remained far below the historical average of approximately 1.98 million homes based on records dating back to 1999.
An inventory of 1.15 million homes corresponds to a mere 3.3-month supply at the current rate of sales, falling short of what is considered a balanced market, which typically has a supply of 4 to 6 months. This ongoing lack of homes for sale, coupled with ever-increasing prices, poses a continued challenge to prospective buyers according to Eugenio Aleman, chief economist at Raymond James.
Several factors have caused the housing inventory to dwindle, including a decade of lagging new home construction and homeowners remaining in their properties for longer durations. Although increasing the housing supply was a platform point for previous President Donald Trump’s election campaign, the resolution of this issue appears to be complex and without immediate solutions.
Lisa Sturtevant, chief economist at Bright MLS, indicated that the average number of home sales in the U.S. has been about 5.2 million annually over the last decade. She warned that it may take years, possibly not until the 2030s, for sales to return to that level, with the prevailing lack of inventory being the main constraint.
Following a dip in mortgage rates in 2020 and 2021 that enhanced buyer purchasing power, economists anticipate a gradual easing of mortgage rates this year. However, it is generally believed that rates are unlikely to dip below 6%, which is still a significant increase compared to averages seen five years ago. Fluctuations in mortgage rates can prompt more activity among homebuyers; the recent decrease in rates last fall contributed to a rise in home sales during the last quarter of the year.
In December, home sales rose by 2.2% from the prior month, achieving an annualized pace of 4.24 million. This exceeded the expectations of analysts who had forecasted a pace of 4.2 million. When compared to December of the previous year, sales surged by 9.3%. In the same month, the median sales price also continued its upward trajectory for the 18th month in a row, reaching $404,000—a 6% increase from the same period the year prior.
The persistent scarcity of homes, especially those priced within reach of average buyers, has exacerbated price increases. This situation has left many first-time buyers struggling to enter the market, as they often lack equity from previous homes to apply toward their down payments. Last month, first-time homebuyers accounted for 31% of all sales, a slight increase from 30% in November and 29% in December 2023. However, their annual representation was only 24%, significantly lower than the historical norm of 40%.
