Why Are Home Sales Falling?
Welcome to the Real Estate Espresso podcast. Your morning shot at what’s new in the world of real estate investing. I’m your host, Victor Menasce. On today’s show, we’re talking about the softening of the residential housing market. It’s underway across both the U.S. and Canada.
Seasonally adjusted numbers are in for the month of June which shows four months of steady decline compared with the previous months. Now, we need to remember that these are seasonally adjusted numbers. The June numbers are still about two percent higher than the same period in 2024, that is in terms of price. Now, this is true for the top-20 primary markets across the U.S. as well as the national averages.
The numbers are pretty consistent for both the Kay Schiller report as well as the National Association of Realtors. Supporting this conclusion is the increase in available inventory. The changes on the surface appear gradual but the averages also obscure the real trends.
We have several years of elevated interest rates and these rates are being held pretty constant by the Federal Reserve again today at their rate setting announcement. The fact is two-and-a-half years is long enough for the market to get over their shock of the higher interest rates and for expectations to normalize. On average the number of days on market has elongated from 21 days to 27. This is still considered relatively short and could be considered to be in seller’s market territory.
Now the headlines are saying the prices have hit an all-time high, but what’s obscuring the underlying market conditions is the fact that thirty percent of the transactions are indeed tax, are indeed cash transactions, which is not interest rate sensitive. The other data point is there’s a continuation of the trend where almost a third of the home sales are not to other owner-occupants.
The institutional buyers that have paused their buying pattern appear to be coming back into the market, and they’re acquiring large numbers of homes. Institutional buyers are getting access to the best financing out there, and they’re able to make the numbers work.
Now while the fed funds rate has not dropped the yield on the 10-year treasury is up somewhat in response to the unexpected high GDP report yesterday. Interest rates have moderated though over the last six months, so the drop in home buying activity must be broken down further to understand the market segmentation.
The most affordable homes at the bottom of the market, they’re moving. The higher-end homes with cash they’re also moving. Paradoxically, it’s the homes in the middle of the market that are experiencing the slowest activity. It’s an unusual situation. In times of economic slowdown in the past it’s often the highest priced homes that sit on the market. That’s not the case right now.
So if homes are not moving and consumer credit card debt is near all-time highs and the jobs data is suggesting that job mobility is also seriously in question, then there has to be another explanation. We’ve also seen house prices having risen faster than encumbers over the last five years and when you lay on top of that the higher interest rates, then home affordability has become a real issue in many parts of the country.
People are reluctant to make a major financial decision if they don’t have the income security. If they don’t know they can count on their job. You also have to remember that those who didn’t have to pay their student loans for much of the past five years are now facing paying those loans back. These folks, they’re 5 years older, they still don’t own a home, and the cash flow that might have afforded a new home will have to go towards servicing other forms of debt including automotive, credit cards, and now student loans.
Automotive sales are down partly because of the cost of tariffs adding between four to ten thousand dollars to the cost of a new vehicle depending on its origin. Now if you need a vehicle for work you’re either going to be buying a used vehicle or you’re going to be biting the bullet to buy a new vehicle, eighty percent of which are financed, at of course higher interest rates.
So unless household incomes are increasing faster than inflation, which we know right now they’re not, the average household can’t keep up with the rising cost of autos homes and consumer debt. The national home builders are also experiencing falling demand, new single family home sales have fallen 6.6% in the first six months of 2025.
Homebuilders have tried to adapt to the falling demand by building smaller, more affordable homes but sales have still fallen even with these adaptions to market demand. DR Horton, the largest home builder in the US at the moment, they’re guiding the Street with a 5.5% decline in sales for the year as a whole.
A recent study from core logic estimates that tariffs, if they persist, would add about $20,000 to the cost of a new home at a $435,000 price point. This all translates into falling homeownership percentages across the nation. In the second quarter of 2024 homeownership was 65.6%, that’s a decrease from 65.9% in 2023 and 65.8% in 2022, but more recently the rate was down as low as 65% in the second quarter of 2025.
That translates into rising demand for rental property, and these rental properties could be single family homes that have been purchased by institutional investors or they might be rental apartments. As you think about that, have an awesome rest of your day, go make some great things happen. We’ll talk again tomorrow.
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