July Housing Market Update: Housing Market Cools as Buyers and Sellers Navigate High Costs

The U.S. housing market saw a significant cooling in July as high mortgage rates and elevated home prices continued to deter buyers, leading to a decrease in home sales and a shift in the balance of power between buyers and sellers.

According to Redfin, existing home sales fell by 2% year-over-year to a seasonally adjusted annual rate of 4.1 million, marking the lowest July level since records began in 2012. This slowdown is attributed to a combination of factors, including persistently high home prices, elevated mortgage rates and broader economic uncertainty.

The cooling market has led to a rise in inventory, giving buyers more options and reducing competition. Zillow reported that inventory levels were nearly 25% higher than in July 2023, while Redfin noted that the supply of homes for sale rose by a record 14% year-over-year. As a result, more sellers are cutting their prices to attract buyers, with Zillow noting that over 26% of listings received a price cut in July, the highest share for any July since at least 2018.

Inventory Levels Climb, But Challenges Remain

Inventory levels have been on the rise, providing some relief to prospective homebuyers who have been struggling with limited options over the past few years. According to Zillow, inventory levels in July were nearly 25% higher than a year ago, marking the eighth consecutive month of year-over-year growth. This increase in inventory is partly due to homes staying on the market longer as buyers hesitate in the face of high costs. Redfin reported that the typical home spent 34 days on the market in July, up from 29 days a year earlier, the longest period for any July since 2020.

However, despite this increase, the market still faces significant challenges. The National Association of Home Builders (NAHB) noted that overall housing starts decreased by 6.8% in July to a seasonally adjusted annual rate of 1.24 million units, the lowest pace since May 2020. Single-family starts saw an even sharper decline, falling 14.1% from June to an 851,000 annualized rate. This decline in new construction is driven by high interest rates for construction loans, ongoing labor shortages and elevated prices for building materials, which continue to stifle the building market.

The rise in inventory, while beneficial for buyers, does not fully address the underlying issue of affordability. Home prices remain near record highs, and the high costs of new construction mean that any significant increase in supply is likely to be slow and uneven across different regions.

Affordability Concerns Continue to Hamper Buyer Activity

Affordability remains a critical issue for the U.S. housing market, as high home prices and mortgage rates continue to put pressure on potential buyers.

Redfin reported that the median sale price in July was $439,170, just 0.7% below the all-time high set the previous month. Despite a slight drop in mortgage rates in July, buyers have been slow to return to the market, partly due to the persistence of high prices. The average interest rate on a 30-year mortgage was 6.49% in July, down from a peak of 7.22% in early May, but still high enough to keep many buyers on the sidelines.

Zillow highlighted that the typical monthly mortgage payment, assuming a 20% down payment, is now $1,900, up 3.4% from last year and a staggering 111.1% higher than pre-pandemic levels. This increase in monthly costs has made homeownership increasingly unattainable for many Americans, particularly first-time buyers who do not have the equity from a previous home sale to offset these costs.

Moreover, the affordability crisis is not confined to homebuyers. Zillow noted that by the end of July, the mortgage payment on a typical home was just under $200 more than the cost to rent a comparable property, down from a $247 gap in April. While this narrowing gap makes buying slightly more attractive, it also underscores the broader issue of housing affordability across the board.

Regional Disparities in Market Conditions

The cooling market and rising inventory levels are not uniform across the country, with significant regional disparities in market conditions. According to Redfin, the strongest buyers' markets in July were found in southern states such as New Orleans, Miami, Austin, Memphis, and Jacksonville, where supply has risen and competition has eased. In contrast, the strongest sellers' markets were in the Northeast and West Coast, particularly in cities like Buffalo, Hartford, San Jose, Boston, and San Francisco.

These regional differences are also reflected in the trends in home prices and sales. Redfin reported that home prices rose most in markets like New Brunswick, NJ (14.6%), Detroit (13.5%), and Newark, NJ (12%). Conversely, prices fell in Austin, TX (-2.6%) and Dallas, TX (-1.2%), highlighting the uneven nature of the market recovery.

Similarly, pending sales rose sharply in cities like San Francisco (13.5%) and San Jose, CA (13.3%), while they plummeted in Houston (-22.1%) and Minneapolis (-11.8%).

The National Association of Home Builders (NAHB) also pointed out that new home construction has slowed across all regions, with the largest declines in the South and West. Single-family and multifamily starts were down 5.4% and 5.1% year-to-date in these regions, respectively, reflecting broader economic challenges and the difficulty of building in areas with high labor and material costs.

Uncertainty Looms Amid Economic Pressures

Looking ahead, the outlook for the housing market remains uncertain. The Federal Reserve's potential interest rate cuts in September could provide some relief to both buyers and builders by lowering borrowing costs. However, as Redfin's Senior Economist Elijah de la Campa noted, waiting for further rate cuts may not be a guaranteed strategy for buyers, as competition could ramp up if more buyers re-enter the market.

Broader economic concerns, including fears of a potential recession and political uncertainty, also continue to weigh heavily on consumer confidence. These factors are likely to influence buyer and seller behavior in the coming months, making it difficult to predict the trajectory of the market with any certainty.

In the meantime, buyers and sellers alike will need to navigate a complex and shifting landscape, where the balance of power continues to evolve in response to changing economic conditions and regional disparities. As the market enters the traditionally slower fall season, it remains to be seen whether the trends observed in July will continue or if new dynamics will emerge to reshape the housing market once again.