After a long, hot summer that saw mortgage rates creep ever higher, October has brought an early winter for the housing market. Existing-home sales dropped a stunning 15% in September on a year-over-year basis to a seasonally adjusted annual rate of 3.96 million transactions, according to the National Association of Realtors (NAR). That’s the lowest figure in 13 years, since 2010, when the world economy, and particularly the U.S. housing market, were struggling to pull out of the Great Financial Crisis.
Contributing factors to the continuous decline in home transactions include surging mortgage rates (which just hit 8% this week—a record in the 21st century), low inventory levels, and home prices that refuse to stop rising. In other words, there aren’t enough homes to buy, money isn’t cheap anymore, and the ones for sale are too rich for most homebuyers’ blood.
Indeed, existing-home sales prices topped $306,000, a 5% increase since the year began, according to the Case-Shiller U.S. National Home Price Index.
“As has been the case throughout this year, limited inventory and low housing affordability continue to hamper home sales,” NAR chief economist Lawrence Yun said in a statement. “The Federal Reserve simply cannot keep raising interest rates in light of softening inflation and weakening job gains.” The Fed has raised rates several times this year, with Chair Jerome Powell arming his “higher for longer” stance.
Declining housing inventory levels also contribute to the drop in housing transactions. Housing inventory is down 8.1% from this time last year, according to NAR. Some real-estate experts and economists argue that housing affordability is even worse now than during 2008, when a damaging downturn in the U.S. housing market set off the dominoes that became the Great Financial Crisis that defined a whole decade economically—and in some ways, our current predicament.
In 2010, the last time existing home sales were so low, the global economy was on life support and the Fed slashed interest rates down to zero to revive the flatlining patient—fueling an “everything bubble” that inflated all kinds of assets along the way, not the least, housing. The zero-rate regime persisted until the highest inflation in 40 years surprised many economists and prompted the massive series of rate hikes that have brought us to the once-unthinkable 8% mortgage.
Some onlookers saw what was coming, for instance Zillow, which warned in May that housing would enter a “deep freeze” if the debt limit standoff failed to resolve and America defaulted, as that would send mortgage rates up to 8%. Of course, the default was averted, but here we have arrived at 8% mortgage rates anyway. But this isn’t like 2008 or 2010 again. It’s time for a 1980s history lesson.
Back to the 1980s future
The housing market today isn’t identical to that of the ‘80s, but it’s pretty close. In a lot of ways, millennials are being forced to follow the housing journey of their boomer parents as they face a frozen, unaffordable market with rising interest rates, as noted recently by both BofA Research economist Jeseo Park and by First American chief economist Mark Fleming.
Essentially, millennials are a giant generation all collectively coming of homebuying age nearly simultaneously—just like their boomer parents in the 1980s. They’re the “biggest share of the “homebuying pie,” as Redfin puts it, purchasing about 60% of homes bought with mortgages during the past few years.
Plus, the raising of interest rates in an effort to combat inflation is strikingly similar to the ’80s. Back then, Fed Chair Paul Volcker fought inflation through aggressive interest rate hikes, with the average 30-year fixed mortgage peaking at about 18% by late 1981. Sound familiar? Current Fed Chair Jerome Powell has set the tone for the most aggressive global hiking of rates in the modern era. And in due course, this week, mortgage rates hit 8%, the highest they’ve been in more than 20 years.
All things considered, home sales activity also plummeted from 1978 to 1982. Existing-home sales dropped 50% during that period, according to the Office of Policy Development and Research. And while we haven’t seen home sales activity levels this low since the 2000s, the housing market more closely mimics that of the ’80s, according to a report published this week by Fortune 500 financial services company First American.
“Today’s housing market isn’t anything like the housing market of the mid-2000s,” First American’s Fleming wrote in a Tuesday report titled “1980s Déjà Vu for the Housing Market.” “The housing market today is not overbuilt, nor is it driven by loose lending standards, subprime mortgages, or homeowners who are highly leveraged.”
While some economic factors are stronger today than they were during the GFC, housing affordability is undeniably worse.
“While housing and more generally consumer fundamentals are in a much stronger position today, affordability for the incremental buyer is worse than it was at the peak in 2006 before the crash,” Roger Ashworth, a managing director at Goldman Sachs, wrote in a credit strategy research paper released last week.
And he’s not hopeful we’ll see home prices drop anytime soon: “Absent any negative shocks to the broader economy that would either boost excess supply of homes on the market or fuel an uptick in unemployment, we continue to expect home prices to rise at a slow pace.” In fact, he predicts we’ll see home prices rise by 1.8% by the end of the year, with a 3.5% increase by the end of 2024.
Looking at more recent housing inventory data makes the issue even more stark. Between September 2018 and September 2023, the average number of homes on the market dropped a whopping 60% to fewer than 700,000 active listings, according to Realtor.com.
“Unlike the turn of the millennium, house prices today are rising alongside mortgage rates, primarily due to low inventory,” Sam Khater, Freddie Mac’s chief economist, said in a statement released Sept. 29. “These headwinds are causing both buyers and sellers to hold out for better circumstances.”
But with the development that home sales transactions are at their lowest level in the past 13 years coupled with century-high mortgage rates of 8%, many real estate experts and economists aren’t hopeful that affordability constraints will let up soon.
Out of fear of losing their lower interest rates, current homeowners are resistant to putting their homes on the market, ultimately leading to the abysmal inventory levels—leaving fewer and fewer properties exchanging hands. Indeed, more than 90% of existing-home owners are locked into mortgage rates below 6%, Odeta Kushi, deputy chief economist at First American, previously told Fortune.
“These homeowners do not have a financial incentive to sell,” Kushi says. “The combination of reduced affordability and an even stronger rate lock-in effect suppresses home sales because you can’t buy what’s not for sale, even if you can afford it.”
