US Home Sales Poised for Worst Year Since 1995 as ‘Lock-in Effect’ Persists

A house for sale in Arlington, Va., on July 13, 2023. Saul Loeb/AFP via Getty Images

Existing home sales in the U.S. real estate market are on track for the worst annual performance since 1995.

According to the National Association of Realtors (NAR), existing home sales declined 1 percent in September, to a seasonally adjusted annualized rate of 3.84 million, the lowest since October 2010. They fell 3.5 percent from the previous year, and have slumped in six of the last nine months.

Inventory volumes of unsold existing homes rose by 1.5 percent, to 1.39 million, equaling 4.3 months of supply.

“Home sales have been essentially stuck at around a four-million-unit pace for the past 12 months, but factors usually associated with higher home sales are developing,” said NAR chief economist Lawrence Yun in a statement.

Housing market conditions have improved from a year ago, Yun adds. Stocks have jumped, mortgage rates are lower than last year, and prices are decelerating.

Median existing home sale prices decelerated for the third consecutive month, to $404,500, though they remain near record highs.

Industry observers had anticipated renewed activity heading into 2024, especially after a sluggish 2023. Instead, the national housing market is frozen, and it may still relate to the pandemic-era monetary policy decisions.

Tied by ‘Golden Handcuffs’

The challenge, says Jaye Hohman, the founder of Hohman Finance, has been current homeowners’ apprehension about selling their residential properties, which they bought at historically low interest rates.

“As is widely known, existing homeowners are reluctant to sell because they likely have those homes financed at rates 25–50 percent below current market rates,” Hohman told The Epoch Times. “As such, the payment is well below what they could obtain by renting the property. In other words, with their current financing in place, the home is a cash-flow positive asset and thus better to be rented than sold.”

During the coronavirus pandemic, the average 30-year fixed-rate mortgage fell to an all-time low of 2.66 percent, creating a mortgage lock-in effect.

Data gathered by economists at the Federal Reserve Bank of New York concluded that “the ability to keep one’s current interest rate has a significant effect on respondents’ moving plans.” The effect is most pronounced among homeowners with mortgage rates below 3 percent and between 3 and 4 percent.

A new Realtor.com study found that many homeowners feel tied to their current properties by “golden handcuffs.” More than half of all outstanding mortgages had an interest rate below 4 percent, and about three-quarters had a rate of 5 percent or lower.

This past summer, Bankrate polled homeowners about what the mortgage rate would need to be to feel comfortable returning to the real estate market. The survey found nearly half (47 percent) would require rates under 5 percent, and 38 percent said no mortgage rate would encourage them to list their home on the market and relocate to a different property.

Over the last month, mortgage rates have been inching higher. Freddie Mac’s latest Primary Mortgage Market Survey showed that the average 30-year fixed-rate mortgage was 6.54 percent, the highest level since August. Though this is down 1.25 percent from a year ago, the rate has risen nearly 0.5 percent since the September low.

The U.S. bond market has been on fire in October. Mortgage rates tend to follow the benchmark 10-year Treasury yield, which has climbed about 70 basis points, to 4.33 percent. Despite the Federal Reserve cutting interest rates for the first time in more than four years and signaling more rate cuts ahead, bond yields have headed in the opposite direction.

“Many potential buyers are being led to believe they may see lower rates in the near term, and so they are on the sidelines,“ Hohman added. ”Other potential buyers have been priced out of entering the market as home affordability has declined.”

At the same time, falling interest rates could exacerbate the housing affordability issues gripping the national real estate market, says Sarah Alvarez, the vice president of mortgage banking at William Raveis Mortgage.

“Prices in many markets remain near record levels even in this elevated rate market, so it is hard to pin down a direct relationship, although it is generally believed that as rates come down and bring more buyers back into the market, it could have an upward pressure on pricing,” Alvarez told The Epoch Times.

A recent Fannie Mae survey found that 42 percent of respondents think mortgage rates will fall in the next 12 months, but 39 percent believe home prices will climb over the same time frame.

Fannie Mae economists forecast that the 30-year fixed-rate mortgage will average 5.9 percent in 2025 and that single-family home prices will climb 3 percent.

New Home Sales

These findings, whether related to the lock-in effect or lackluster inventories, help explain the divergence between existing home sales and new single-family home transactions.

According to the Census Bureau, new home sales increased more than 4 percent in September, to a seasonally adjusted annual rate of 738,000. They have also risen six of the nine months in 2024.

At the end of last month, a seasonally adjusted estimate of new homes was 470,000, representing a supply of 7.6 months.

Individuals resting on the sidelines are not tied to a historically low mortgage rate, meaning they can take advantage of a drop in the 30-year mortgage rate or home prices.

Despite four consecutive weekly decreases in mortgage applications, Mortgage Bankers Association deputy chief economist Joel Kan says they have “continued to run stronger than last year’s pace.”

Looking Ahead to 2025 and Beyond

The affordability trap might paralyze prospective homebuyers over the next year.

A blend of solid economic data and falling interest rates has many market watchers projecting price appreciation in the coming year.

Goldman Sachs Research, for example, estimates that U.S. home prices will rise 4.4 percent in 2025, while the National Association of Realtors sees them climbing 2.7 percent.

Analysts at Norada Real Estate Investments do not envision a national housing market. Though growth may moderate next year, strong demand and increased supply will keep the housing market strong.

“However, attention is needed for potentially overvalued regional markets that could see more substantial price corrections,” they said in a report.

On a long-term basis, Goldman Sachs Research analyst Vinay Viswanathan believes the U.S. housing market “will get back near a healthy level of affordability by the end of the decade, so it will be a five-year odyssey of slow normalization.”