Existing-Home Sales Plunged in 2023

The sales of existing homes plunged last year amid soaring mortgage rates and elevated prices even as new-property sales fared better, according to Wells Fargo economists, a dynamic that made buying a home unaffordable for large swaths of Americans.

The high cost of home loans helped reduce sales of existing homes in 2023 by 19 percent, in what Wells Fargo analysts say was the “second straight steep annual decline” for the housing-market segment. Sales of new houses, however, increased by nearly 4 percent for the year.

Mortgage rates skyrocketed over the course of last year, peaking at a two-decade high of 8 percent in the fall. The cost of home loans soared due to the Federal Reserve’s hiking of interest rates in response to accelerating prices, which at one point turbocharged to 40-year highs. The central bank’s tightening of monetary conditions sparked a jump in borrowing costs for everything in the U.S. economy, including mortgages.

Charlie Dougherty, senior economist at Wells Fargo, told Newsweek that mortgage rates shot up quickly, from around 3 percent in 2021 to 7 percent in a relatively short time. A rapid jump in price increases also outpaced incomes, which made it challenging to buy a home.

“All of those factors kind of contributed to the downdraft in home sales that we saw in the resale market last year,” he said.

Wells Fargo pointed out that the S&P Core Logic National Home Price Index (HPI) rose nearly 50 percent from January 2020, far surpassing the 18 percent increase in household incomes during the time span.

High mortgage rates and elevated prices didn’t only impact buyers; they also made sellers reluctant to put their homes on the market, Dougherty said.

“Most sellers are also buyers. So if there are affordability issues constraining your ability to buy a new home, that’s going to weigh down on supply as well,” he told Newsweek. “The one impact of higher mortgage rates is that if you refinanced over the past few years or maybe you bought a house and got a mortgage with a very low rate, you’re probably not really all too excited about getting rid of that low monthly mortgage payment.”

The outlook going forward could shift amid a drop in the cost of home loans. On Thursday, Freddie Mac’s weekly average for the 30-year fixed rate declined to 6.74 percent from 6.88 percent a week earlier.

“The 30-year fixed-rate mortgage decreased again this week, with declines totaling almost a quarter of a percent in two weeks’ time,” Sam Khater, Freddie Mac’s chief economist, said in a statement.

Wells Fargo economists forecast that rates will decline further in anticipation of the Federal Reserve’s reduction of borrowing costs at some point this year, as inflation slows. They forecast the 30-year rate would come down to about 6.5 percent by the end of the year, and decline further in 2025, to 5.85 percent.

The latest signals have given hope for an improved market. The existing-homes market started the year with about a 3 percent jump in sales and mortgage applications have also increased, even though they still run below 2023’s activity.

“There’s some signs that the recent small drop in mortgage rates has sort of enlivened demand again,” Dougherty said.

But a drop in borrowing costs may not solve the affordability crisis that has gripped the housing sector. Wells Fargo points out that home values are now about five times higher than median household incomes.

“Mortgage purchase applications have been more-or-less flat so far in 2024 and continue to run slightly below last year’s pace. This indicates that home sales are likely to remain tepid over the next several months,” Wells Fargo economists said in their analysis.

But a decline in mortgage rates could unlock the existing-homes market, as those sellers sitting on their current low home loans may feel comfortable to finally sell their property. Wells Fargo expects this year’s existing-home sales to rise to 4.3 million and jump by 400,000 more in 2025 from the 4.1 million seen last year.

Also, new homes may also help the market, as sales are forecast to increase to a 721,000-unit pace in 2024, as buyers chase availability and affordability in that segment, Wells Fargo economists said.

Yet, with prices expected to stay elevated, the housing market may take a while to fully rebound.

“If the home prices continue to go up, then maybe affordability doesn’t improve all too much where it would allow home sales to really jump back to the pace that we saw in 2021, for example,” Dougherty said. “Moving forward, you can expect some relief in terms of affordability, but overall, because of higher home prices, you know kind of keeping a limitation on activity, you’re not very likely to see a forceful recovery.”