Despite mortgage rates hitting two-year lows this fall, total home sales fell to their lowest level in 14 years, according to Freddie Mac’s Economic and Housing Research Group (EHRG).

“Total (new and existing) home sales fell 0.2 percent in September as homebuyers wait for rates to decrease,” the group said in its analysis. “Existing home sales continued their downward trend with sales in September at the lowest level since October 2010 at 3.84 million. Existing sales continue to reel under the pressure of high mortgage rates and the rate lock-in effect.”

This slowdown has helped increase housing inventory, but not quite enough to offset the supply crunch that has plagued the market for some time. The supply of existing homes in September was 4.3 months, the highest since October 2020. Despite this increase, supply remains low by historical standards – five to six months is what is considered consistent with a balanced housing market, the group stated.

It was not all bad news – new home sales rose slightly to 738,000 in September, consistent with the current trend of new home sales running above the pre-pandemic average. Part of this may be attributed to builders using sales incentives to make new homes more attractive to potential buyers as mortgage rates increased from the lows seen during the pandemic.

A slowdown in multifamily construction resulted in a deceleration in overall housing construction – EHRG noted total housing starts declined 0.5 percent from August, and 0.7 percent from last September. Multifamily construction decreased 15 percent year-over-year.

“Homebuilder confidence inched up for the second consecutive month to 43, according to the National Association of Home Builders’ Housing Market Index,” the group stated. “Though increasing for the second time in six months, the index has remained below 50 since August 2023, indicating that building conditions are expected to remain poor in the near term.”

House price appreciation is slowing down – the Federal Housing Finance Agency’s House Price Index indicated prices increased 0.3 percent month-over-month and 4.2 percent year-over-year in August, and all nine census divisions showed annual increases, ranging from 2.4 percent in the West South Central division to 6.3 percent in the East North Central division. While house prices continued to increase, it was at a reduced rate compared with the increase in appreciation recorded in 2022.

The homeownership rate in the third quarter (Q3) was slightly lower at 65.6 percent, compared with the 66 percent recorded the year before. Between Q3 2023 and Q3 2024, the total number of housing units rose from 145.4 million to 147 million, an increase of around 1.5 million units. Occupied units increased by 1.7 million, while vacant units fell by 0.2 million, reports from the Census Bureau showed.

“The increase in occupied housing units was primarily driven by renter-occupied units which increased by 1.1 million units from 44.3 million in Q3 2023 to 45.5 million in Q3 2024,” EHRG stated. “However, owner-occupied units increased only 0.6 million units from 86 million to 86.6 million. The homeowner vacancy rate ticked slightly up from 0.9 percent in Q2 2024 to 1 percent in Q3 2024 and was up from 0.8 percent in Q3 2023. The renter vacancy rate at 6.9 percent in Q3 2024 increased from 6.6 percent in Q2 2024 and from the 6.6 percent a year ago.”

The group also looked into mortgage rate trends over the last year. Mortgage rates rose from their pandemic lows, with September seeing 6.08 percent and the last week of October showing 6.7 percent. The 30-year fixed-rate mortgage as measured by Freddie Mac’s Primary Mortgage Market Survey averaged 6.43 percent in October. While homebuyers are waiting on the sidelines for mortgage rates to go down, especially after the 50-basis point rate cut by the Federal Reserve, most of the declines in rates were already baked in by the first Fed rate cut, the group observed.

“Rising rates are unwelcome news to potential homebuyers who might have been hoping that Fed rate cuts would result in lower mortgage rates,” EHRG stated. “However, if we look back historically at past rate cutting cycles, we see that interest rates typically do not fall much following a rate cut. If we look at the previous six rate cutting cycles, six weeks after the initial Fed rate cut mortgage rates increased on average 0.1 percentage points. This is because mortgage rates are influenced by the long-term rates, which [are] already priced in the Fed rate cut.

“With economic growth surprising[ly] on the upside, bond market participants are starting to consider a slower pace of future rate cuts and factor in the potential for higher-than-expected inflation in the near-term. This has resulted in upward pressure on long-term rates, including mortgage rates.”

The group forecasted that in the near-term, rates may continue to be volatile and higher rates will keep home sales muted for the remainder of 2024, though further rate cuts from the Fed are expected. EHRG stated it believed rates will gradually decline throughout 2025, which should loosen some of the rate lock-in effect for existing homeowners and offer more inventory. The rate lock-in effect for October increased again as mortgage rates increased — up from $38,000 in September to $42,000 as of October 2024. Lower rates and the boost to inventory should lead to slightly higher home sales in 2025, and while the group expected house prices to continue to grow, it should be at a slower pace.