The Federal Reserve is hoping to provide some economic relief to Americans through an interest rate cut made in September, as preparation for a potential recession continues. Higher interest rates have stunted the housing market, as home buyers are pulling back due to high borrowing costs and soaring home prices. Mortgage rates hit their highest level in two decades, briefly touching 8% last October, but recent economic indicators have caused the mortgage rates to fall, leading to curiosity in potential homebuyers about what the future will look like. Here, we explain what lower rates could mean for new and existing home sales.
Existing Home Sales
Existing home sales measure the monthly sales of previously owned single-family homes. It makes up a huge part of the residential real estate market, as 90% of purchased homes are previously owned. An increase in existing home sales can indirectly stimulate economic activity with increased consumer spending on new furnishings and appliances. On the other hand, a sustained drop in existing home sales often foreshadows a downturn in the economy.
The number of sales nationally increased 1.3 percent month-over-month to an annual pace of 3.95 million transactions in July 2024. While the first increase since Q1, it’s still a 2.5 percent decrease from last year (National Association of Realtors).
New Home Sales
Generally, lower interest rates have a positive impact on new home sales due to an increase in affordability. When mortgage rates decrease, buyers can afford more expensive homes for the same monthly payment, and homebuilders can sell homes quicker, as they are seen as a commodity.
Current Housing Inventory
The current housing inventory is slowly increasing after being severely low. The total housing inventory, or the overall number of homes for sale on the market, stood at 1.33 million units at the end of July, a 0.8% increase from June but a 19.8% jump from the previous year. The figure represents a 4-month supply, which is getting closer to the 5-to-6 months typically required for a healthy, balanced market.
Despite the sharp rise in mortgage rates this past fall, things may be looking up for homebuyers. Consumers are beginning to see more choices and affordability is improving due to lower interest rates. While home sales remain weak, lower mortgage rates should bring more potential sellers off the sidelines and increase affordability somewhat.
