U.S. Home Sales Suffer Unprecedented Plummet

American home sales have collapsed despite low interest rates and the expectation of more expensive mortgages just around the corner.  Existing home sales fell 7.1% in February, significantly below expectations. In total, a seasonally adjusted annual rate of 5.08 million home sales were seen in February, representing a modest 2.2% year-over-year increase from the same time a year ago.

American home sales have collapsed despite low interest rates and the expectation of more expensive mortgages just around the corner.  Existing home sales fell 7.1% in February, significantly below expectations. In total, a seasonally adjusted annual rate of 5.08 million home sales were seen in February, representing a modest 2.2% year-over-year increase from the same time a year ago.

The weather was again blamed for the fall in home sales. National Association of Realtors chief economist, Lawrence Yun, said the decline is partly the result of cold weather in the eastern part of the U.S. “The lull in contract signings in January from the large East Coast blizzard, along with the slump in the stock market, may have played a role in February’s lack of closings,” he said.

However, the warmer parts of America also suffered a decline in home buying activity, where weather cannot explain the contraction. In the southern states, existing home sales fell 1.8%, while in the west, existing home sales fell 3.4%. Nonetheless, home prices rose 5% and 7% in both regions, respectively.

Yun admitted that rising home prices might be the real culprit in real estate’s collapse in activity. Homes are becoming too expensive for a growing number of Americans: “the main issue continues to be a supply and affordability problem. Finding the right property at an affordable price is burdening many potential buyers,” he said.

Economists find the sudden decline in home sales to be worrying because of several issues that make housing weaker in the future. While mortgages have fallen to extremely low levels from a long-term historical perspective, home loan interest rates are expected to rise later in the year when the Federal Reserve raises interest rates.

If Americans are not buying houses now at these low rates, they are even less likely to buy houses as rates rise. “The overall demand for buying is still solid entering the busy spring season, but home prices and rents outpacing wages and anxiety about the health of the economy are holding back a segment of would-be buyers,” said Yun.

Housing prices have continued to rise over the last 7 years, while real and nominal household incomes have actually declined since 1999, according to the Census Bureau. With strong home price gains and weak wages, housing is becoming less and less affordable. If home sales fall further, it could lead to another collapse in housing prices similar to the housing bubble crash of the late 2000’s.

First-time homebuyers and lower income Americans are also facing growing competition from investors, who are driving sales of lower-priced houses. “Now that there are fewer distressed homes available, it appears there’s been a shift towards investors purchasing lower-priced homes and turning them into rentals. Already facing affordability issues, this competition at the entry-level market only adds to the roadblocks slowing first-time buyers,” said Yun.