US existing home sales hit 7-month high; affordability remains a challenge

U.S. existing home sales rose to a seven-month high in September, reaching an annual rate of 4.06 million units, primarily driven by strong demand for higher-priced homes, with sales over $1 million accelerating 20.2% year-over-year. Despite mortgage rates easing to a one-year low of 6.19%, affordability remains a significant constraint for many prospective buyers, limiting broader market growth. Inventory increased 14% year-over-year, and the median existing home price rose 2.1% to $415,200. Economists project sales to remain flat through early next year before a more substantial improvement in 2026, contingent on further rate declines and a stronger labor market.

Analysis

U.S. existing home sales reached a seven-month high in September, increasing 1.5% month-over-month to an annual rate of 4.06 million units, and 4.1% year-over-year. This growth was primarily concentrated in the upper end of the market, with sales of homes priced over $1 million accelerating 20.2% year-over-year. The median existing home price also rose 2.1% year-over-year to $415,200, indicating continued price appreciation.

Despite a decline in 30-year fixed mortgage rates to a one-year low of 6.19% from 7.04% in January, affordability remains a significant challenge for many prospective buyers, particularly lower and middle-income households. This is compounded by a hazy economic outlook and a stalled labor market, limiting broader market demand for purchase loans. Inventory, however, increased 14.0% year-over-year to 1.55 million units, providing 4.6 months of supply, which is within a healthy range.

Economists project existing home sales to move sideways through early next year, with substantial improvement not anticipated until 2026, contingent on further mortgage rate declines and a stronger economic and labor market footing. The current government shutdown is also delaying contract closings due to issues like flood insurance availability. While first-time buyers increased to 30% of sales, this is still below the 40% share considered robust for the housing market.

Key Decisions for Investors

• Investors should recognize the bifurcated housing market, with strength concentrated in the high-end segment, suggesting potential opportunities in luxury real estate or related services.
• Monitor macroeconomic indicators such as mortgage rate trends, labor market health, and overall economic stability, as these are critical for a broader housing market recovery beyond early 2024.
• Consider the implications of sustained affordability challenges and a cautious outlook for general housing demand, potentially favoring companies with resilient business models or those catering to refinancing activity rather than new purchases.