August Housing Market Update: Mortgage Rates Decline, Sparking Buyer Optimism

Declining mortgage rates in August provided a glimmer of hope for homebuyers across the country.

After months of climbing rates, the average 30-year mortgage fell to 6.5%, down from 7.07% a year earlier, marking the first annual decline in three years, according to Redfin. This dip in rates, which brought more affordability to the market, came as a welcome reprieve for buyers, whose purchasing power had been dampened by higher borrowing costs.

In response to the rate cuts, some prospective buyers were reignited with optimism, spurring renewed interest in home shopping. Though the rate decline was modest, it translated into significant savings for many buyers.

Nationwide, the monthly mortgage payment on a typical home purchase dropped by more than $100 from its peak in May, according to Zillow’s report. In pricier markets, like San Francisco, the savings were even more substantial, with monthly costs falling by more than $300.

Despite these improvements in affordability, buyers remained cautious, with some holding out in hopes that rates would dip further. Michael Cendejas, a real estate agent with Redfin, noted that many buyers were looking for rates in the 5% range before jumping back into the market.

The drop in rates may also have long-term implications for the housing market. As Danushka Nanayakkara-Skillington, NAHB’s assistant vice president for forecasting and analysis, explained, "The loosening monetary policy over the coming months will boost new home building by lowering the construction loan rates for builders."

This trend suggests that, as rates continue to decrease, both buyers and builders may benefit from increased activity in the housing market.

Slowdown in Existing Home Sales

Despite the drop in mortgage rates, existing home sales continued to decline in August. According to Redfin, sales of existing homes fell by 1% month-over-month and 3.1% year-over-year to a seasonally adjusted annual rate of 4.04 million units. This represents the lowest level on record since 2012, excluding the pandemic-induced slowdown in May 2020.

The ongoing reluctance of homeowners to sell, combined with still-high home prices, has contributed to this persistent decline.

Many homeowners are hesitant to sell, largely because of the so-called "lock-in effect" caused by their existing lower mortgage rates. With current mortgage rates still higher than pandemic lows, many homeowners are unwilling to trade in their historically low rates for a new mortgage with higher rates. This reluctance, in turn, is limiting the supply of existing homes, putting upward pressure on prices and leaving fewer options for buyers.

In addition to existing home sales, pending sales—a forward-looking indicator of housing market activity—also showed signs of weakness. Pending sales fell 1.9% month-over-month and 2.4% year-over-year in August, reflecting a slower pace of market transactions.

These declines suggest that buyers may still be grappling with elevated home prices, even as mortgage rates come down.

New Construction on the Rise

While the resale market has slowed, new construction has shown signs of strength. In August, single-family housing starts increased by 15.8% to a seasonally adjusted annual rate of 992,000 units, according to data from the U.S. Census Bureau and the National Association of Home Builders (NAHB). This jump in new construction reflects strong demand for new homes, as builders aim to capitalize on the slight easing of mortgage rates.

The growth in new construction also comes at a time when the supply of existing homes remains tight. Builders have been working to fill the gap left by hesitant sellers, offering more options to buyers who are looking for homes that may be more affordable or desirable.

"Single-family starts were up in August as demand remains strong despite several supply-side challenges," said Carl Harris, chairman of NAHB.

Builders have been contending with ongoing challenges such as high material costs and labor shortages, but demand has remained robust, particularly in regions with more available land and growing populations.

Permits for future construction also rose, further indicating that the trend in new homebuilding may continue. Overall housing permits increased by 4.9% in August, with single-family permits rising by 2.8%, signaling optimism among builders about future market conditions.

As the Federal Reserve continues to ease interest rates, the new construction sector could see even more growth, providing some relief to the inventory-starved housing market.

Regional Market Divergences

The national housing market is not monolithic, and August’s data revealed significant differences across regions.

While the South and West saw the most growth in inventory, the Northeast and Midwest remained more constrained. According to Realtor.com, the South saw active listings increase by 45.6% year-over-year in August, while the West experienced a 34.5% growth in inventory. These regions have been leading the recovery in housing supply, driven by the availability of land and new construction activity.

In contrast, the Midwest and Northeast saw much smaller gains in inventory. Listings in the Midwest grew by just 23.1%, and the Northeast saw a 13.9% increase in active listings compared to last year. These regions are still grappling with tighter housing supply and slower market activity. Compared to pre-pandemic inventory levels, the gap is much wider in the Northeast and Midwest, with inventory down 54.6% and 44.7%, respectively, compared to typical 2017-2019 levels.

Home prices also varied across regions. In August, the largest price gains were observed in the Northeast, where median listing prices rose by 4.3%, according to Realtor.com. Meanwhile, home prices in the Midwest and West remained flat, and the South saw a slight price decline of 1.5%.

This regional disparity reflects the differing supply-demand dynamics, with regions experiencing the highest inventory growth also seeing more tempered price increases or declines.