Key Points:

• Existing-home sales as a percentage of total households are historically low, at just 2.9 percent. By contrast, the pre-pandemic average was 4.4 percent. 
  
  
• Only 94 of every 10,000 existing homes are for sale, lower than the pre-pandemic historical average of 220 of every 10,000 homes. 
  
  
• Given the current number of households in the U.S. today, a more normal level of seasonally adjusted annualized existing-home sales, would be 5.8 million, 50 percent above the current rate of 3.86 million.

As we look ahead to the end of 2024 and into 2025, the housing market faces competing forces -- demand-boosting dynamics on one side and momentum-slowing dynamics on the other. The result? A likely modest recovery in existing-home sales from current cycle lows, though a return to “normalcy” remains elusive. 

“For the housing market to regain momentum, it will take both a significant increase in the number of homes on the market and continued affordability improvements.”

Anything But Normal

Existing-home sales as a percentage of total U.S. households remain historically low, at just 2.9 percent. By contrast, the pre-pandemic historical average was 4.4 percent. Given the number of households in the U.S. today, we would expect annualized home sales to be closer to 5.8 million to align with historical levels. The current rate of existing home sales is 3.86 million.

The chronic, ongoing shortage of homes for sale is one major obstacle. Total inventory of existing homes for sale relative to the number of households, or “inventory turnover,” has historically been about 2.2 percent – or 220 per 10,000 homes –at any given time. In August 2024, that number was a mere 94 per 10,000 homes, up slightly from earlier this year, but still far from sufficient. The reason? The “rate lock-in” effect remains a defining characteristic of the current market. With many homeowners locked into ultra-low mortgage rates secured during the pandemic, they are reluctant to sell and re-enter the market at today’s higher rates, despite record levels of equity. Those potential buyers, who would most likely also be sellers, are also hesitant to enter the market when inventory is low, for fear of not being able to find a more attractive home to buy. 

The Good and The Bad

In a recent analysis, we highlighted the first year-over-year improvement in housing affordability since 2021, with additional modest improvements expected to follow in 2025. The primary reason we expect affordability to improve further is the widely held consensus that mortgage rates will continue their gradual decline into next year. If realized, this would boost the housing market. Easing mortgage rates would not only improve affordability for buyers, but also loosen the rate lock-in effect currently keeping many would-be sellers on the sidelines. If mortgage rates were to drop to 5.8 percent by 2025, as some forecasts suggest, it would encourage some sellers to list their homes, bringing much-needed additional inventory to the market. Unfortunately, according to the latest NMBD data, 84 percent of mortgaged homes have a rate below 6 percent, so the number of sellers that would be financially incentivized to sell would remain limited. 

On the buyer side, lower mortgage rates would reduce monthly payments, widening the pool of prospective homeowners. If mortgage rates do fall to 5.8 percent, a simple analysis reveals that approximately 12 million renter households, or 28 percent of all renter households, could afford a median-priced existing home. This influx of potential buyers represents a reserve of demand, currently waiting on the sidelines for the right conditions. This pent-up demand may offer the most significant boost to the housing market moving forward.

However, if lower mortgage rates stimulate demand due to improved affordability to a greater degree than they increase supply as the rate lock-in effect loosens, well, that’s a recipe for faster price appreciation…again.

The Likely

The pent-up demand exists – and it may turn out to be the most significant boost to the housing market. However, the lingering scourge of market-dampening, record-low inventory remains. For the housing market to regain more momentum, it will take both a significant increase in the number of homes on the market and continued affordability improvements. Until then, while the worst may be behind us, the road to recovery will likely be a slow one.

September 2024 Existing-Home Sales Outlook Highlights

For the month of September, First American updated its Existing-Home Sales Outlook Report to show that:

• Existing-home sales for September are expected to increase 0.7 percent from August’s pace of sales and decrease 5.8 percent compared with the predicted pace of sales a year ago.
  
  
• The largest contributors to the projected monthly increase in existing-home sales are increased house-buying power (+0.4 percentage points), an easing of the rate lock-in effect (+0.15 percentage points), and momentum (+0.06 percentage points).
  
  

Methodology

Our Existing-Home Sales Outlook Report ‘nowcasts’ existing-home sales, which include single-family homes, townhomes, condominiums, and co-ops on a seasonally adjusted annualized rate based on the historical relationship between existing-home sales, U.S. demographic trends, house-buying power, and the prevailing financial and economic conditions, as well as momentum, a weight assigned to past values. Please note that the Existing-Home Sales Outlook Report is based on assumptions about demographic, economic and financial conditions. Actual values may differ from those projected. Recent existing-home sales estimates are subject to revision to reflect the most up-to-date information available on the economy, housing market and financial conditions.