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Record Low Home Sales Hit as Prices Reach New Heights

Home sales in May dropped to some of the lowest levels recorded, impacted by steep prices, elevated mortgage rates, and a persistent housing shortage that continues to deter potential buyers.

 

According to recent data from Redfin, only two months in the past decade have seen fewer home sales: October 2023, when mortgage rates reached a 23-year high, and May 2020, during the initial stages of the pandemic.

 

Elijah de la Campa, a senior economist at Redfin, highlighted the current market dynamics, noting, "Buyers are confronting the realities of a competitive market despite the low transaction volume."

 

Key Insights from the Data:

 

In May, seasonally adjusted home sales decreased by 1.7% compared to the previous month and fell by 2.9% year-over-year. Meanwhile, the median sale price surged by 5.1% year-over-year to reach a record $439,716.

The average 30-year-fixed mortgage rate rose to 7.06% in May, up from 6.43% a year earlier and more than double the historic low of 2.68% seen during the pandemic.

Despite rising prices, many sellers had to reduce their listing prices due to decreased buyer interest caused by high mortgage rates, resulting in longer days on the market for homes.

In May, approximately 19% of homes reduced their prices, compared to 13.2% a year ago, with the typical home spending 32 days on the market. This is the longest duration for any May since 2020, similar to figures observed a year earlier, especially in areas like Florida and Texas where housing inventory has expanded.

 

Although the number of homes for sale has slightly increased, it remains 25% below pre-pandemic levels. New listings rose marginally by 0.3% from the previous month and significantly by 8.8% from the previous year. Active listings, encompassing unsold homes, rose by 0.4% from April and soared by 11.1% year-over-year.

 

Implications for Real Estate Investors:

The current real estate market continues to exhibit anomalies, with prolonged listing periods for homes in certain regions due to restrained buyer interest amidst high mortgage rates.

 

Moreover, potential home sellers are hesitant to list their properties, preferring to retain lower fixed rates, which were significantly lower than current rates by up to three percentage points. This reluctance, coupled with slower home construction and aging baby boomers opting to stay in their homes longer, has exacerbated the housing shortage.

 

Elijah de la Campa noted, "Sales are sluggish due to high transaction costs, which are dissuading both buyers and sellers." He added, "In competitive markets, limited inventory is fueling bidding wars, driving home prices to new highs."

 

Looking ahead, a potential decrease in mortgage rates could stimulate home sales. However, with inflation showing signs of decline, the Federal Reserve plans to maintain current rates until September, anticipating a gradual adjustment thereafter.

 

Conclusion:

Despite record-high home prices, the decrease in home sales indicates a shift away from a seller's market, granting buyers more bargaining power in select regions. Yet, the rise in interest rates has deterred even these prospective buyers.

 

Given the Federal Reserve's cautious approach until autumn, the real estate market may experience continued stagnation throughout the summer, necessitating patience from real estate investors in the interim.


In previous post: "How to invest in real estate"

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