Home Sales Drop 4.2% Year-Over-Year, But Prices Rise 3.1% Setting Record. What Is Going On?

In real estate sales, the basic law of supply and demand holds that the more buyers there are in the marketplace, the more inventory will be depleted, causing home prices to rise. Conversely, when the number of buyers wanes, the inventory of listed homes increases and sales prices will drop.

According to the National Association of Realtors (NAR), in August 2024, sales of previously owned homes fell 2.5% from July and 4.2% from August 2023. The adjusted annualized rate was 3.86 million homes. These numbers were short of analysts' expectations and it marked the third consecutive month of sales below the annualized four million mark. The inventory of unsold homes was up 22.7% year-over-year.

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So, given the sales decline of 4.2% year-over-year and inventory rising 22.7%, why would sales prices set a record and increase year-over-year by 3.1%? On the surface, that seems illogical.

The answer is- even though total inventory rose, there is still only a 4.2-month supply of homes for sale. A balanced buyer-seller market normally has a 6-month supply of available homes. Therefore, sellers are still in control and prices remain elevated.

At least one person thinks that may change soon. Lawrence Yun, the ever-optimistic chief economist of NAR, noted that although August sales were disappointing, declining mortgage rates plus increasing inventory should be a powerful combination to increase sales in future months.

However, many recent sales were from investors and step-up buyers with cash. First-time buyers accounted for only 26% of the August sales, equaling the November 2021 all-time low mark. Cash sales also made up 26% of the total. While the median sales price in August was $416,700, home sales over $750,000 were up significantly, while home sales below $500,000 declined. This indicates that younger generations with moderate incomes have been priced out of the real estate market.

While mortgage interest rates declined between July and August, they held steady at 6.15% for the three days after the Fed announced its 50-basis point interest rate cut on September 17. U.S. Treasury yields rose from 4.75% to 5.00% the morning after the announcement as investors reacted to the 50-basis point Fed cut as an indication that there will be no recession. 

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The popular, yet inaccurate, notion that mortgage rates drop after the Fed cuts rates is often spoon-fed to the public through the media. Mortgage rates are based on the 10-year Treasury yield and tend to decline in anticipation of the Fed cutting rates, not ex-post-facto. Although refinance applications rose 24% from the previous week, purchase applications were only up 5%.

Still, recent news about the Fed's interest rate cut could spur hesitant buyers to renew their home searches. This would be a public-relations win for the much-beleaguered real estate market.

Unfortunately, many of these young buyers are about to get a cold dose of reality when they learn that the one-percent decline in the 30-year interest rate over the past year was not significant enough to lower payments on homes that have risen 3.1% over that same time. In September 2023, a $400,000 house with 20% down and a 7.20% 30-year loan had a principal and interest (P&I) payment of $2,409. Today, that house costs $412,400 and that same monthly P&I on a 6.20% loan is $2,358, only $51 less. However, with the price increase, a 20% down payment is now an additional $2,480 and the closing costs will be approximately $744 more.

Fed cuts or not, it may be a long time before the real estate market improves.

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