Home Sales Plunge Despite Affordability Improving

Existing home sales fell 1% in January to a seasonally adjusted annual rate of 4.0 million, marking the lowest level since 2010, according to the National Association of Realtors. This decline comes despite mortgage rates dropping and affordability improving, creating a puzzling disconnect in the housing market.

Key Statistics:

• January existing home sales: 4.0 million (seasonally adjusted annual rate)
• Month-over-month change: -1%
• Year-over-year change: -0.7%
• Median home price: $382,600 (up 3.7% from January 2024)
• Average 30-year fixed mortgage rate: 6.65% (down from 6.8% in December)

The housing market is experiencing a paradox where traditional affordability metrics suggest increased purchasing power, yet buyer activity continues to decline. The median home price increased 3.7% year-over-year, while the average 30-year fixed mortgage rate dropped to 6.65% from 6.8% in December.

Market Context: This trend reflects deeper structural issues in the housing market beyond simple affordability calculations. Despite lower mortgage rates providing some relief, several factors continue to suppress buyer demand:

1. Inventory Constraints: Limited housing supply continues to push prices higher, offsetting the benefits of lower interest rates
2. Economic Uncertainty: Concerns about job security and broader economic conditions are making potential buyers cautious
3. High Home Prices: Even with lower rates, the absolute cost of homes remains prohibitive for many buyers
4. Lock-in Effect: Homeowners with low-rate mortgages from previous years are reluctant to sell and lose their favorable terms

The National Association of Realtors attributes the sales decline to "ongoing affordability challenges and limited inventory," though the data suggests the situation is more complex. While mortgage rates have fallen from their peak of over 7% in 2023, they remain significantly higher than the sub-3% rates available during the pandemic years.

Regional Variations: Sales declines were widespread across regions, with the Northeast experiencing the steepest drop at 4.6%. The Midwest saw a 2.1% decline, while the South and West posted modest gains of 0.7% and 0.3% respectively.

The housing market's current state represents a significant shift from the pandemic-era boom, when record-low mortgage rates and remote work policies drove unprecedented demand. Today's market is characterized by higher rates, persistent inflation concerns, and a fundamental mismatch between supply and demand.

What This Means for the Market:

The continued weakness in home sales despite improving affordability suggests that the housing market may need more than just lower interest rates to recover. Real estate analysts point to several implications:

• Price Stabilization: The combination of higher prices and lower sales volume may lead to price stabilization or modest declines in some markets
• Extended Market Times: Homes are likely to stay on the market longer as buyer demand remains subdued
• Increased Negotiation Power: Buyers may gain more leverage in negotiations as competition decreases
• Policy Pressure: The persistent weakness in the housing market could increase pressure on policymakers to address supply constraints and affordability issues

The housing market's current trajectory raises questions about whether the traditional relationship between mortgage rates and home sales has fundamentally changed. While lower rates typically stimulate demand, the current market suggests that other factors—particularly inventory constraints and economic uncertainty—may be more influential in determining buyer behavior.

As the market continues to adjust to post-pandemic conditions, the disconnect between improving affordability metrics and declining sales volume highlights the complexity of the housing sector and the challenges facing both buyers and sellers in the current environment.

Sources:

• National Association of Realtors existing home sales report
• Freddie Mac Primary Mortgage Market Survey
• Bloomberg economic data