Key Points:

• Comparing the pace of home sales today to past decades without considering the growing number of households is misleading. 
  
  
• Existing-home sales as a percentage of total households have declined to early 1990s levels, just above 3 percent, and well below the long-run average of 4.1 percent.
  
  
• The number of new-home sales as a percentage of the total number of households over time has fallen to levels not seen since the early 1990s, about 0.5 percent, and well below the long-run average of 0.7 percent.

In February, existing-home sales were at 4.26 million on a seasonally adjusted annualized basis. This is the same level of sales as during the aftermath of the Global Financial Crisis (GFC) and the late 1990s. However, comparing today's home sales to those in the past without considering the growth in the overall market size is like comparing today’s apples with yesterday’s oranges.

“Comparing the pace of home sales today to those in the past without considering the overall market size is like comparing today’s apples with yesterday’s oranges.”  

More Households, More Roofs

The total number of U.S. households, which represents the demand for homes, is constantly growing. So, an annual pace of 4 million existing-home sales today is, relatively speaking, much weaker than the same number 15 years ago, given the increase in demand. Today, there are 132 million households, compared to 112 million households 15 years ago, an 18 percent increase in demand.

If we look at existing-home sales as a percentage of the total number of households over time, we see that sales are down to the same levels as the early 1990s, just above 3 percent, and well below the long-run average of 4.1 percent. If home sales today were tracking at the long-run average percentage of total households, the pace would be almost 5.4 million. So, compared to the current pace of 4.26 million sales, where did more than a million sales go?

Sales activity is below average primarily because existing homeowners aren’t selling for two main reasons. They are either locked into their current mortgage rates, older and choosing to stay in their homes, or both. While affordability for first-time home buyers is a significant challenge, the real issue is that existing homeowners aren’t selling, and slightly lower rates don’t change that. But with time and aging, this will change.

Same Story, Different Reasons for the New Home Market

Using a similar analysis, the relative sales of new homes have also declined. The number of new-home sales as a percentage of the total number of households over time has fallen to the same levels as the early 1990s, about 0.5 percent, and well below the long-run average of 0.7 percent. If new-home sales were tracking at the long-run average percentage of total households, the pace would be almost 950,000. The reasons for this decline are different from the existing-home market. Builders face less competition due to the chronic housing shortage made worse by the ‘seller’s strike,’ but their construction costs have increased significantly. They also have to navigate regulatory restrictions, making it difficult to scale up construction to meet growing demand, let alone reduce the overall housing supply shortage.

Putting it All Together

In February, total combined home sales were 5 million seasonally adjusted annualized sales, or 3.7 percent of total households, which is 1.1 percentage points below the historic pre-pandemic average of 4.8 percent. If total home sales were tracking at the long-run average percentage of total households, the pace would be 6 million. Other than the brief dip in 2010, due to the expiration of the first-time home buyer tax credit, this level of sales activity as a share of total households is similar to the early 1980s.

The current state of both existing-home and new-home sales highlights the importance of adjusting for household growth when analyzing the housing market. While the number of sales may seem comparable to past decades, the growing number of households and changing market dynamics reveal a different story. Existing homeowners are holding onto their properties due to the mortgage rate lock-in effect and their preference to age in place, while builders face increased construction costs and regulatory hurdles. By considering the number of home sales as a percentage of total households, we gain a clearer picture of the market's true performance.