Existing home sales fall to the lowest level since 2010

REAL ECONOMY BLOG | October 19, 2023

Authored by RSM US LLP

Existing home sales fell in September to the lowest level since 2010 as mortgage rates hit a multidecade high.

Even if the Federal Reserve holds interest rates steady in the next two months, the lagged impact of monetary tightening, especially quantitative tightening, has continued to put pressure on long-term yields.

The bonds selloff in the third quarter with the 10-year Treasury yield marching toward 5%–the highest since 2007—has brought mortgage rates, which correlate with long-term yields, to close to 8%.

As a result, demand for existing homes has plunged in six out of seven months since February, falling to 3.96 million in September, according to data released Thursday by the National Association of Realtors. That was equivalent to a 13% drop in seven months.

The decline has occurred even as the market remains millions of homes short in meeting the underlying demand. But with prices and mortgage rates at multidecade highs, many Americans looking for a home simply cannot afford one.

That is particularly true for single-family homes, which drove most of the decline in existing home sales and are a lot more expensive. Condominium and co-op sales, while also dropping in September, remained above the low of 2020.

Because of elevated borrowing costs, there were more all-cash buyers last month than the previous five months, reaching 29%. A year ago, the figure was 22%.

Looking ahead, even if the short-term interest rates stay at the same level, the Federal Reserve will not stop its quantitative tightening, or reducing its balance sheet, anytime soon. That should keep the long-term interest rates high for quite some time, dampening demand for existing homes.

Buyers, as a result, have been looking for opportunities from the new home market, where supply has been more solid. That said, we should not expect any material improvement from housing sales until mortgage rates stabilize.

Buyers are most likely pulling back, waiting to spend when rate cuts begin, which won’t be until the middle of next year at the earliest.