Home Sales on Track for Worst Year Since 1995

Sales of existing homes in the U.S. are on track for the worst year since 1995— for the second year in a row.

Persistently high home prices and elevated mortgage rates are keeping potential home buyers on the sidelines. Sales of previously owned homes in the first nine months of the year were lower than the same period last year, the National Association of Realtors said Wednesday.

Existing-home sales in September fell 1% from the prior month to a seasonally adjusted annual rate of 3.84 million, NAR said, the lowest monthly rate since October 2010. Economists surveyed by The Wall Street Journal had estimated a monthly decrease of 0.5%.

September sales fell 3.5% from a year earlier.

After a sluggish 2023, economists and real-estate executives widely expected activity to pick up in 2024.

But mortgage rates have stayed higher throughout the year than some had forecast, including in recent weeks after the Federal Reserve’s interest-rate cut last month. That has kept home-buying affordability low .

Home prices have continued to rise, as inventory in many parts of the country is still below normal historical levels. Climbing home insurance costs and a coming election are also adding to buyers’ uncertainty.

“Home sales are stuck at low levels,” said Lawrence Yun , NAR’s chief economist. “Americans are really not moving.” Yun said he forecasts that existing-home sales for 2024 as a whole could match or be slightly below last year’s level.

Expectations that the Fed would cut rates this year caused mortgage rates to drop to 6.08% in September, a two-year low. But the move came too late in the year to lure buyers, real-estate agents say. Many families prefer to purchase in the spring and move houses between school years.

The reprieve in rates also didn’t last long. Mortgage rates have risen for three straight weeks to the highest level since August.

“That trickle up in rates, to right back where we were, just sucked the air out,” said Michael Read, owner of Bridgeway Mortgage & Real Estate Services in Morristown, N.J.

Mortgage rates tend to loosely follow the yield on the 10-year Treasury note, which has been above 4%. But the spread between mortgage rates and the 10-year has widened to above historical norms in recent years, which can push up borrowing costs.

Lenders often sell mortgages to investors. Those investors demand a bigger return, particularly when rate volatility is higher than normal, because mortgages are riskier than ultrasafe government bonds.

Uncertainty around the presidential election and “murkiness” around recent labor and inflation data haven’t helped, said Mike Fratantoni , chief economist at the Mortgage Bankers Association.

Mortgage applications have fallen for four straight weeks as rates have risen.

“It’s tough in this business,” said Alex Elezaj , chief strategy officer at United Wholesale Mortgage. “Once you think it’s going one way, it goes another.”

A drop in mortgage rates later this year or next would make home purchases more affordable, but that benefit could be offset if home prices continue to rise. In September, 42% of more than 1,000 people surveyed said they expect mortgage rates to fall in the next 12 months, but 39% said they expect home prices to rise over the same period, according to Fannie Mae .

The national median existing-home price in September was $404,500, a 3% increase from a year earlier, NAR said. While that is down from the recent high, it is the highest median home price for any September, Yun said. Prices aren’t adjusted for inflation.

Widespread frustration with the housing market has made affordability an important campaign topic . Both parties have offered proposals to bring down housing costs. Vice President Kamala Harris has rolled out plans for building more housing, for example, and offering help with down payments. Former President Donald Trump has proposed cutting regulations and allowing more building on federal land.

For the buyers who are able to jump into the market now, there is less competition and more room to negotiate. The typical home sold in September was on the market for 28 days, up from 21 days a year earlier, NAR said.

Lucy and Graham Schroeder tried buying a house in the suburbs of Madison, Wis., in 2023 and again this past spring, but they got outbid by other buyers. When they re-entered the market this summer, “it felt like something kind of shifted,” Graham Schroeder said. “Houses were kind of sitting a little bit.”

The couple bought a five-bedroom home in August for $585,000, about 5% below the listing price, and sold their smaller home for $330,000.

The number of homes for sale or under contract rose 23% in September from a year earlier, NAR said, but it remains below normal levels in many markets. Many homeowners who locked in low rates on their current mortgages a few years ago are staying put, because they are reluctant to take on a new loan at a higher rate.

At the current sales pace, there was a 4.3-month supply of homes on the market at the end of September. That is at the low end of what is considered a balanced market between buyers and sellers.

Kaitlin Skilken and Matt Adler competed against other buyers to buy a house this spring in Wheat Ridge, Colo.
David Schlichter

Kaitlin Skilken and Matt Adler experienced the cool-down in the market firsthand. The couple competed against other buyers to purchase a house this spring in Wheat Ridge, Colo. But when they listed their townhouse in a nearby city for sale in June, it sat for almost two months.

Other units in the community were also sitting on the market, and the homeowner association’s insurance policy didn’t comply with every lender’s requirements, making it more difficult for buyers to get a mortgage, Adler said. “‘You only need one buyer,’ is what I kept saying,” Skilken said.

The couple sold the townhouse in September for the $475,000 asking price, and they paid a $12,000 credit to the buyers for some home repairs and to help lower the buyers’ interest rate.

Home-buying activity typically slows during the holiday season. Some real-estate agents say they expect sidelined buyers to re-enter the market in early 2025.

“It’s not like all of a sudden people have stopped needing to buy houses,” said David Schlichter, a real-estate agent in Denver. “You can only defer for so long.”

News Corp , owner of the Journal, also operates Realtor.com under license from NAR.

For months, I have been one of the few commentators openly stating what the data was already showing: property prices had begun to fall.

The latest figures confirm it. Cotality’s June 1 Home Value Index showed Sydney values down 0.9 per cent in May and Melbourne down 0.8 per cent. ANZ has cut its national capital city forecast to 2.8 per cent growth this year, down from 4.8 per cent in April. CBA has also downgraded its outlook.

So the Federal Budget arrived at the worst possible time, with the wrong prescription, to treat a problem it fundamentally misunderstands.

Treasurer Jim Chalmers has suggested that making it easier for first-home buyers to get a fair crack at auctions is a good thing. The reality is more complicated.

Driving property prices down does not simply hand a discount to first-home buyers. It affects the 1.4 million Australians employed by the property sector, the 67 per cent of household wealth tied to housing, and the state government revenues that fund schools, hospitals and roads.

The government had a choice: tackle supply constraints, link migration growth to housing completions and reduce spending, or increase taxes on property investors. It chose the latter.

Property is an economic pillar

Property is not simply another investment class. It contributes about 10.6 per cent of GDP directly, up to 15 per cent when flow-on effects are included, and employs more than 1.4 million Australians. It also generates more tax revenue than mining and underpins consumer confidence through the wealth effect.

Against that backdrop, the Budget removed negative gearing from established residential properties purchased after Budget night and replaced the 50 per cent capital gains tax discount with cost-base indexation and a 30 per cent minimum tax from July 1, 2027.

The government calls this fairness. I call it a misdiagnosis.

The grandfathering trap

The policy is also internally contradictory.

Properties purchased before Budget night are grandfathered, allowing existing investors to retain full negative gearing and capital gains tax benefits until they sell. The logical response is simple: hold.

That means fewer properties coming onto the market, fewer rental listings and reduced transaction volumes.

The result is likely to be higher rents, reduced stamp duty revenue and further inflationary pressure at a time when the Reserve Bank remains focused on bringing inflation under control.

The government is attempting to fight inflation with one hand while fuelling it with the other.

Who really owns investment properties?

What is often lost in this debate is who Australia’s property investors actually are.

According to ATO data, 71 per cent of investors own just one investment property. They are not wealthy property moguls.

They are teachers, nurses, police officers and small business owners who have purchased an investment property as part of their retirement strategy.

For many Australians, property remains the most tangible and trusted pathway to building long-term wealth.

Removing the incentives that supported that investment does not hurt a billionaire developer. It hurts ordinary Australians trying to secure their financial future.

Investors aren’t the affordability problem

It is true that housing affordability has deteriorated significantly over the past two decades. However, negative gearing is not the primary cause.

Research by economists Ross Kendall and Peter Tulip found planning and zoning restrictions significantly increase housing costs.

Their work showed zoning lifted detached house prices well above marginal construction costs in Sydney, Melbourne, Brisbane and Perth.

Low interest rates, strong population growth, chronic under-supply and restricted access to development-ready land have all played a much larger role in pushing prices higher.

Punishing private investors does nothing to address these structural issues.

The Build-to-Rent advantage

At the same time the government is reducing incentives for Australian investors, it has created a more attractive tax environment for foreign institutional capital through Build-to-Rent projects.

Under current arrangements, foreign institutional investors can access a 15 per cent withholding tax rate through Managed Investment Trusts, accelerated depreciation benefits and exemptions from the new negative gearing restrictions.

State governments have added further concessions, including land tax reductions and exemptions from foreign investor surcharges.

Australian mum-and-dad investors receive none of these advantages.

The cumulative effect is striking. Foreign institutions can access a range of tax benefits unavailable to Australian private investors, while local investors lose concessions they have relied upon for decades.

This is not solving the housing crisis. It risks transferring ownership of Australia’s rental housing stock from local investors to offshore institutions.

Why state governments should worry

There are already signs these changes are affecting the credit cycle.

Major banks are removing negative gearing benefits from serviceability calculations for investment loans.

As market conditions soften, lenders become more cautious and investors find it harder to secure finance.

That matters because property transactions are a major source of state government revenue.

In NSW alone, transfer duty generates more than $12 billion annually. If transaction volumes fall significantly, the impact on state budgets will be substantial.

The consequences extend beyond stamp duty to GST collections, payroll tax receipts and land tax revenue.

The 95 per cent loan trap

There is another aspect of the Budget that concerns me.

The government has expanded first-home buyer deposit guarantee schemes, allowing eligible purchasers to buy with a five per cent deposit backed by the Commonwealth.

The intention is admirable. The timing may not be.

If prices in Sydney and Melbourne fall further, buyers entering the market with 95 per cent loan-to-value mortgages could quickly find themselves in negative equity.

They become trapped. They cannot sell without crystallising a loss, while the taxpayer guarantees the loan and the bank remains protected.

That is not wealth creation. It is a debt obligation.

After three decades working with debt and investment, I would never encourage my own children to borrow at a 95 per cent loan-to-value ratio.

A policy built on politics

The government had an opportunity to address the housing crisis by encouraging supply, reforming planning systems and reducing development costs.

Instead, it chose Robin Hood politics.

The optics may be appealing, but the economics are not.

Australians may ultimately pay the price through higher rents, weaker investment and a future in which an increasing share of the nation’s housing stock is owned by offshore institutions rather than local investors.

Paul Miron is the Co-Founder & Fund Manager of Msquared Capital.