The U.S. housing crisis deepened this spring. What does this mean for home buyers and sellers?

LOS ANGELES (AP) — The housing market shows no signs of breaking out of a three-year slump after a disappointing spring season and a bleak outlook for the summer and fall.

Homebuyers entered 2024 optimistic that mortgage rates would fall further after falling late last year. But those hopes were dashed as stronger-than-expected inflation and economic data cast a shadow over the timing of a potential interest-rate cut by the Federal Reserve.

By April, the average interest rate on a 30-year home loan topped 7% for the first time since November. That, coupled with record-high home prices, has forced many would-be homebuyers to put off their search for a home—some indefinitely.

Economists expect mortgage rates to fall slightly by the end of this year. But the slight drop in rates may not be enough to attract buyers and convince homeowners that it is a good time to sell their homes.

Here’s a look at the key trends behind the housing market’s trajectory so far this year and what buyers and sellers can expect in the second half of 2024:

The spring home buying season was a failure again.

On average, more than a third of homes sold in a given year are purchased between March and June. This is known as the spring home buying season, and it has been a disappointing season in recent years.

Sales of previously occupied homes in the United States fell from March to June compared to the previous year in both 2022 and 2023. Sales were down in March, April and May of this year, and indicators suggest that June also saw a decline.

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The weak spring sales reflect the affordability challenges facing many homebuyers: The average 30-year mortgage interest rate is hovering around 7%; the supply of homes for sale is at an all-time low; and home prices are at record highs.

Rising interest rates deter home buyers

The average interest rate on a 30-year mortgage is 6.95%, according to Freddie Mac, more than double what it was in early July 2021.

Mortgage rates are influenced by several factors, including how the bond market reacts to the Federal Reserve’s interest rate policy and movements in the 10-year Treasury yield, which lenders use as a guide to pricing home loans.

The yield on the 10-year U.S. Treasury note, which topped 4.7% in late April, has mostly fallen recently after some economic data showed slowing growth, which could help curb inflationary pressures and persuade the Federal Reserve to start cutting its key interest rate from its highest level in more than 20 years.

Federal Reserve officials said in June that inflation had approached its 2% target in recent months and indicated they expected to cut benchmark interest rates once this year.

However, economists expect the average interest rate on a 30-year home loan to remain above 6%.

There are not enough homes for sale.

Another obstacle for home buyers is the unprecedented low inventory of homes on the market.

The good news: The number of homes for sale at the end of May was the highest since August 2022, a trend that bodes well for homebuyers this summer. The bad news: The supply of homes available for sale nationwide remains well below pre-pandemic levels.

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The supply of homes for sale across the United States was limited before COVID-19 due to more than a decade of below-average new home construction and demographic trends that led homeowners to hold on to their properties longer.

The large gap between current mortgage rates and just three years ago (3%) has also discouraged many homeowners who received very low prices from selling, which real estate experts refer to as the “lock-in” effect.

The price is not right

The national median sales price of a previously occupied home rose 5.8% in May from a year earlier to $419,300, the highest level since 1999, according to the National Association of Realtors. It’s also up 51% from just five years ago.

But price increases are slowing. CoreLogic’s home price index shows U.S. home prices rose 4.9% in May from a year earlier, the smallest increase since October. The real estate data tracker expects national home price growth to slow to 3% by next May.

“The sharp rise in mortgage rates this spring has slowed both homebuyer demand and prices,” said Selma Heap, chief economist at CoreLogic.

Home prices have begun to slow as more homes remain on the market longer. Urban areas in Florida, Texas, Georgia and other states where housing construction has accelerated in recent years have also seen price growth slow.

Some economists worry that a slight decline in mortgage rates without a jump in the inventory of homes on the market could work against buyers struggling to afford a home by giving sellers an incentive to raise the asking price.

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“It makes me a little bit concerned about what happens to home prices when prices go down, because I think that would stimulate demand without really stimulating supply, at least in the short term,” said Daryl Fairweather, chief economist at Redfin. “That could lead to a sharp rise in prices.”

Should anyone buy now?

Homebuyers who can afford to purchase a home now should take advantage of a wider selection of homes available on the market.

Anyone who can afford to pay cash may also want to buy in the near term.

“Prices have gone up, and they probably won’t go down, so there’s no real reason to wait if you’re not waiting for prices to come down,” said Redfin’s Fairweather.

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