Home sales get hammered by higher mortgage rates, but one region is holding up

By Aarthi Swaminathan

'Home sales are stuck' because of high mortgage rates, NAR says

The numbers: U.S. home sales fell in March as home buyers pulled back due to rising mortgage rates.

Sales of previously owned homes fell by 4.3% to an annual rate of 4.19 million in March, the National Association of Realtors said Thursday.

That's the number of homes that would be sold over an entire year if sales took place at the same rate every month as they did in March. The numbers are seasonally adjusted.

The pace of sales exceeded expectations on Wall Street, which was forecasting a 4.17 million pace for March.

Compared with March 2023, home sales are down 3.7%.

Key details: The median price for an existing home in March rose 4.8% to $393,500, as compared with the year before. That's the highest price ever recorded for the month of March.

Prices are still down from a peak in June 2022, when the median price of a resale home hit $413,800.

Around 29% of properties were sold above list price, the NAR said.

The total number of homes listed on the market in March rose 14.4% from last year, to 1.11 million units.

Homes listed remained on the market for 33 days on average, down from 38 days in the previous month.

Sales of existing homes were mostly down across the nation. The only region where sales rose was the Northeast, where they went up by 4.2%. The median price of a home in that region was $434,600. The NAR said the increase was partly because inventory has been strained in the region, and that as listings come on the market, buyers are snapping them up, which is pushing up sales.

The West saw the biggest decline in home sales in March, at 8.2%.

All-cash buyers made up 28% of sales. The share of individual investors or second-home buyers was 15%.

About 32% of homes were sold to first-time home buyers, the highest share since March 2021.

Big picture: The housing market has encountered a big speed bump in the form of mortgage rates.

Higher rates present two problems: Mortgages become more expensive, since higher rates increase borrowing costs, and the lock-in effect persists as homeowners with lower mortgage rates are reluctant to make a move.

What the NAR said: "Higher mortgage rates always impact real estate, always impact home sales," Lawrence Yun, chief economist at the NAR, said in a call with reporters.

"Though rebounding from cyclical lows, home sales are stuck because interest rates have not made any major moves," he said.

For instance, in California, there are fewer homes available for sale than there were in spring 2020, when the U.S. was in the midst of the coronavirus lockdown, according to the California Association of Realtors.

"Inventory is likely to be tighter than normal for the foreseeable future" due to the lock-in effect, Jordan Levine, chief economist at the CAR, told MarketWatch.

What are economists saying? The "only clear path forward" for home prices to fall and affordability to improve is if inventories rise, Thomas Simons, U.S. economist at Jefferies, wrote in a note. He added that this is "still a long way off."

That's mostly because "the very strong underwriting standards during the last housing expansion along with solid labor market conditions and the massive increase in home equity over the last few years will reduce the risk of defaults and forced selling going forward," he added.

"This is a good thing for homeowners, but a bad thing for prospective buyers trying to get into the market," Simons said.

"Psychologically, a 7% handle is harder to swallow than a 6% handle, but as rates begin to head down again, which will hopefully happen in [the third quarter], the lock-in effect will be offset," Bess Freedman, CEO of real-estate company Brown Harris Stevens, told MarketWatch.

But "a lot depends on the Fed and inflation at this point," she added.

Looking ahead: "We're forecasting a very subdued recovery in existing home sales to 4.6 [million] by the end of 2025," Thomas Ryan, property economist at Capital Economics, wrote in a note.

"That forecast is based on our view that borrowing costs will fall from where they are now, but not enough to fully offset mortgage rate 'lock-in' effects, which will continue to hold back sales volumes," he said.

Market reaction: Real-estate-brokerage stocks such as Compass (COMP), Redfin (RDFN) and Zillow (ZG) were mixed in early trading on Thursday. The yield on the 10-year Treasury note BX:TMUBMUSD10Y was over 4.6%.

-Aarthi Swaminathan

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04-18-24 1054ET

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