Existing home sales fall near January low as rates surge

REAL ECONOMY BLOG | August 22, 2023

Authored by RSM US LLP

Sales of existing homes fell in back-to-back months as multi-decade high mortgage rates continued to suppress demand and supply.

The data from the National Association of Realtors certainly added more risks to our call that a housing bottom has passed.

July sales were much lower than expected, dropping by 2.2% on the month compared to a forecasted decline of only 0.2% earlier.

The drop was the fourth decline in five months, bringing total sales down to 4.07 million, only a hair above the recent low of 4 million in January.

It has been clear that the housing market is on a declining path after a strong but short rebound in the first six months, again largely because of increasing mortgage rates.

The impact of mortgage rates on supply as the lock-in effect intensified was clear as the median prices rose for the first time in six months, up 1.9% from a year ago.

Our call that housing had bottomed out came from our estimate that disinflation would continue further so that inflation rate would consolidate around 2.8% to 3% by year’s end. That would keep the Federal Reserve away from hiking once more in September.

Risks and policy approach

The base case remains the same, yet it is important to acknowledge the upside risks to growth, inflation and spending after a host of robust economic data from spending and production output in recent months.

On top of that, a move to a higher long-term inflation target rate speculated by the market and academics ahead of the Fed’s meeting in Jackson Hole, Wyo., this week has certainly put more upward pressure on mortgage rates.

We expect some questions regarding the topic directed toward Fed Chairman Jerome Powell, yet it remains unclear whether we could see some hint for the first time on the Fed’s long-term plans.

More likely than not, the Fed will acknowledge the structural changes within the economy post-pandemic just as the event title suggests, “Structural Shifts in the Global Economy,” which will have an impact on its policy stances.

The takeaway

Mortgage rates will stay elevated for quite some time as no rate cut by the Fed is expected this year. For this reason, we expect sales of existing home sales to remain under stress. The shift toward new home sales should continue as the demand for housing remains unfilled.