The Housing Market’s Stubborn Freeze: Why Existing Home Sales Keep Falling Despite Lower Mortgage Rates

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The American housing market refuses to thaw.

Existing home sales dropped 0.5% in May to a seasonally adjusted annual rate of 4.11 million units, according to data released Tuesday by the National Association of Realtors. That marks the third consecutive monthly decline and places sales firmly below the pace most economists had predicted. The reading disappointed even the more bearish forecasters, who had expected a modest uptick to roughly 4.13 million units. Year over year, sales fell 2.1%, a stark reminder that the post-pandemic housing recovery remains largely theoretical for the vast majority of would-be buyers.

The numbers arrive at a peculiar moment. Mortgage rates have drifted lower from their autumn 2024 peaks, with the average 30-year fixed rate hovering near 6.8% in recent weeks. That’s down from the 7.2% range seen last October. In a normal market, such a decline would inject energy into buyer activity. This isn’t a normal market.

“We’re seeing more inventory, which is a positive development, but the الحسابات simply aren’t working for many families,” said Lawrence Yun, the NAR’s chief economist, in a statement accompanying the release, as reported by Yahoo Finance. The median existing-home price rose 2.8% year over year to $407,600 in May, setting yet another record for the month. So buyers face a brutal double squeeze: prices that keep climbing and borrowing costs that, while off their highs, remain roughly double what they were three years ago.

The so-called “lock-in effect” continues to dominate the market’s psychology. Roughly 60% of outstanding mortgages carry rates below 4%, according to estimates from the Federal Housing Finance Agency. Homeowners who locked in at 2.75% or 3.1% during the pandemic-era refinancing boom have little financial incentive to sell and take on a new mortgage at nearly twice the cost. This has constrained the supply of existing homes for over two years now, and May’s data suggests the constraint is only loosening at the margins.

Inventory did rise. Total housing inventory at the end of May stood at 1.40 million units, up 6.1% from April and 17.4% from a year earlier. At the current sales pace, that represents a 4.1-month supply, the highest level since early 2021. But context matters here. A balanced market is typically defined as six months of supply. We’re not close.

And the inventory gains are geographically uneven. The South, which accounts for the largest share of existing home transactions, saw the most meaningful increase in listings. Parts of Florida and Texas have experienced notable inventory buildups as pandemic-era migrants reassess and insurance costs surge. Meanwhile, the Northeast and Midwest remain acutely supply-constrained, with bidding wars still common for well-priced properties in suburban markets outside New York, Boston, and Chicago.

First-time buyers represented just 27% of May’s transactions. That figure has hovered near historic lows for months. A generation ago, first-time buyers routinely accounted for 40% or more of the market. The gap reflects the compounding affordability crisis: student debt loads, elevated rents that make saving for a down payment nearly impossible, and entry-level home prices that have outpaced wage growth by wide margins in most metropolitan areas.

Cash buyers, by contrast, remain a dominant force. All-cash transactions made up 33% of sales in May, well above the pre-pandemic norm of roughly 25%. Investors, downsizers sitting on substantial equity, and wealthy buyers moving from higher-cost markets continue to crowd out financed purchasers. It’s a two-track market in the starkest sense.

The Federal Reserve’s posture adds another layer of uncertainty. The central bank held rates steady at its June meeting and signaled it expects just one rate cut in 2024, down from the three cuts projected in March. Mortgage rates are influenced by Treasury yields and broader market expectations as much as by the federal funds rate itself, but the Fed’s hawkish tone has kept any meaningful rate relief from materializing. Traders in the futures market are now pricing in the first cut no earlier than September, and even that expectation looks fragile given persistent inflation readings in services and shelter costs.

The irony is thick. Shelter inflation — the cost of housing as measured in the Consumer Price Index — remains one of the stickiest components keeping overall inflation elevated. And the very supply constraints that prop up home prices and rents are partly a function of the rate environment the Fed created to fight inflation. It’s a feedback loop with no easy exit.

New construction has picked up some of the slack, but not enough. Builders have pivoted toward smaller, more affordable homes and are offering rate buydowns and other concessions to attract buyers. Yet housing starts have been volatile, and the homebuilding industry faces its own headwinds: elevated lumber and materials costs, labor shortages that predate the pandemic, and regulatory barriers that vary dramatically by state and municipality.

Regional variation in May’s existing home sales data tells its own story. Sales in the West fell 2.6%, the steepest decline among the four major regions tracked by NAR. The South posted a 1.3% drop. The Midwest was essentially flat. Only the Northeast managed a gain, eking out a 1.3% increase — likely driven by pent-up demand in markets where inventory has been most severely limited.

Some analysts see the makings of a slow turn. “The increase in inventory is real and it’s meaningful, even if sales haven’t responded yet,” wrote economists at Pantheon Macroeconomics in a client note this week. They argue that the lag between rising listings and rising transactions is typical, and that the second half of the year could show modest improvement — particularly if mortgage rates drift toward 6.5% as they expect. But even in their optimistic scenario, existing home sales would finish 2024 below the 2023 total of 4.09 million, which was itself the worst year since 1995.

Not everyone shares that optimism. Analysts at Capital Economics have argued that the housing market is settling into a “new normal” of structurally lower transaction volumes, driven by demographics, affordability constraints, and a homeowner base that is older, wealthier, and less inclined to move. If they’re right, the pre-pandemic norm of 5 to 5.5 million annual existing home sales may not return for years.

The political dimensions are sharpening as November approaches. Housing affordability has become a bipartisan talking point, though the proposed solutions diverge sharply. The Biden administration has pushed for expanded down payment assistance, tax credits for first-time buyers, and incentives for local governments to reduce zoning barriers. Republicans have focused on deregulation, permitting reform, and reducing what they characterize as government interference in housing markets. Neither side has offered a credible plan to address the lock-in effect, which is arguably the single largest impediment to a functioning resale market.

Wall Street’s reaction to Tuesday’s data was muted. Homebuilder stocks, as measured by the SPDR S&P Homebuilders ETF, barely moved. The market has largely priced in a prolonged period of weak existing home sales, and public builders like D.R. Horton, Lennar, and NVR have benefited from the resale market’s dysfunction by capturing demand that would otherwise flow to existing homes. Their stocks are up sharply this year.

For the millions of Americans who want to buy a home — or sell one — the macro data confirms what they already feel. The market is stuck. Mortgage rates aren’t low enough to unlock supply. Prices aren’t falling enough to restore affordability. And the policy tools available to Washington are limited in their ability to resolve what is fundamentally a supply-and-demand imbalance decades in the making.

May’s existing home sales report is one data point. But it reinforces a pattern that has held for two years: the American housing market is frozen in place, and no single catalyst appears likely to break the ice anytime soon.