Home sales slowed to a crawl in 2023. Here’s why.

Home sales plunged in 2023 to a nearly 30-year low amid surging mortgage rates, a shortage of available properties and rising real estate prices. 

The National Association of Realtors said Friday that existing U.S. home sales totaled 4.09 million last year, an 18.7% decline from 2022. That is the weakest year for home sales since 1995 and the biggest annual decline since 2007, the start of the housing slump of the late 2000s.

The median national home price for all of last year edged up just under 1% to record high $389,800, the NAR said. Only about 16% of homes around the country were affordable for the typical home buyer last year, Redfin economist Zhao Chen told CBS News last month. By comparison, the share stood at about 40% prior to 2022.

Last year’s home sales slump echoes the nearly 18% annual decline in 2022, when mortgage rates began rising, eventually more than doubling by the end of the year. That trend continued in 2023, driving the average rate on a 30-year mortgage by late October to 7.79%, the highest level since late 2000.

The sharply higher home loan borrowing costs limited home hunters’ buying power on top of years of soaring prices. A dearth of homes for sale also kept many would-be homebuyers and sellers on the sidelines.

“A persistent shortage of homes for sale and some uptick in demand due to the recent decline in mortgage will keep home price growth positive 2024,” Nancy Vanden Houten, lead U.S. economist for Oxford Economics, said in a research note. “If more sellers enter the market in response to lower mortgage rates, the increase in supply might weigh on prices, but only at the margin.”

Home prices rose for the sixth straight month in December. The national median home sales price rose 4.4% in December from a year earlier to $382,600, the NAR said.

Mortgage rates have been mostly easing since November, echoing a pullback in the 10-year Treasury yield, which lenders use as a guide to pricing loans. The yield has largely come down on hopes that inflation has cooled enough for the Federal Reserve to shift to cutting interest rates this year.

The average rate on a 30-year home loan was 6.6% this week, according to mortgage buyer Freddie Mac. If rates continue to ease, as many economists expect, that should help boost demand heading into the spring homebuying season, which traditionally begins in late February.

Still, the average rate remains sharply higher than just two years ago, when it was 3.56%. That large gap between rates now and then has helped limit the number of previously occupied homes on the market by discouraging homeowners who locked in rock-bottom rates from selling.

“We need more inventory to get the market moving,” said Lawrence Yun, the NAR’s chief economist.

Despite easing mortgage rates, existing home sales fell 1% in December from the previous month to a seasonally adjusted annual rate of 3.78 million, the slowest sales pace since August 2010, the NAR said.

Where are mortgage rates headed?

Many economists expect mortgage rates to remain just above 6% by year-end.

“We expect mortgage rates to drop back from 6.8% currently to 6.25% by the end of the year,” Thomas Ryan, property economist with Capital Economics, in a report. “In our view, that modest fall won’t be enough to unwind mortgage rate ‘lock-in’ and bring a great deal more stock onto the market. Because of that, we’re forecasting a  subdued recovery in sales volumes to 4.3 million by end-2024.”

December’s sales fell 6.2% from a year earlier. Last month’s sales pace is short of the roughly 3.83 million that economists were expecting, according to FactSet.

“The latest month’s sales look to be the bottom before inevitably turning higher in the new year,” Yun said. “Mortgage rates are meaningfully lower compared to just two months ago, and more inventory is expected to appear on the market in upcoming months.”

According to a recent survey from Fannie Mae, as of December some 31% of consumers expected mortgage rates to decline over the next 12 months, a more optimistic outlook than the previous month.