US home sales fell in April for the second consecutive month, according to a report released by the National Association of Realtors on Thursday.
The decline in sales was accompanied by the largest drop in home prices since 2012. Sales of existing homes, including single-family homes, townhomes, condominiums, and co-ops, dropped 3.4% from March and were down 23% annually.
The seasonally adjusted annualized sales pace also decreased from 5.57 million units a year ago to 4.28 million in April.
Although the current sales pace is higher than the low point of four million units at the end of last year, it remains 33% lower than the cyclical peak in January 2022, analysts noted.
US home sales were hit by affordability and supply constraints, according to James Knightly, chief international economist at ING, who noted that new home sales should continue to outperform existing ones in this environment.
Affordability will continue to be a huge issue
While all four major US regions experienced monthly and annual declines in sales, areas with higher costs and significant price increases in recent years witnessed more significant drops. The median existing-home price for all housing types in April was $388,800, marking a 1.7% decrease from April 2022, the largest drop since January 2012.
Affordability will continue to be a huge issue. The latest weekly Mortgage Bankers Association data showed that the typical mortgage for a new home taken out last week was a 30-year fixed rate product with a size of $440,400 at a rate of 6.57%, giving a monthly mortgage payment of $2,804, a record high compared to the $1,750 per month level a year ago.
Limited options
Low inventory, combined with higher mortgage rates, is hindering sales, as potential buyers face limited options. Although demand remains strong, fresh listings are not keeping pace with historical norms, resulting in fewer new homes entering the market.
Higher borrowing costs and a general lack of affordability after prices rose nearly 50% through the pandemic have constrained demand, ING’s Knightley noted.
“(We) also have to recognize there is a lack of supply out there, which is also contributing to lower transaction numbers,” he said.
“The more than doubling of mortgage rates over the past 18 months means many homeowners who would like to move are effectively locked in by the cheap financing they secured on their current property. New home sales have consequently been performing more strongly despite the drop in mortgage applications for home purchases – the buyers that are out there simply don’t have much to choose from.”
Commercial real estate in trouble
But commercial real estate is the bigger concern as office vacancies and higher refinancing risks point to rising loan losses, according to Knightley.
Last week the Federal Reserve warned of the challenges facing the commercial real estate sector since the sharp jump in interest rates over the past 14 months raises the risk that commercial real estate loans will be difficult to refinance. Up to $1.5 billion of these loans need to be refinanced by 2025.
“What makes this so problematic for the property market and construction sectors is that small banks account for such a high proportion of commercial bank lending to both residential and commercial property,” ING’s Knightley said.
“This will have knock-on effects for other lending markets, with banks increasingly reluctant to lend across the board. This is hugely significant as what turns struggling businesses into failing businesses is when credit availability evaporates.”
Contact Angela at angela@proactiveinvestors.com
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