Existing home sales exceed forecasts as prices jump

REAL ECONOMY BLOG | March 21, 2024

Authored by RSM US LLP

Existing home sales came in much stronger than expected to post the biggest monthly increase in a year, the National Realtor Association reported on Thursday. There were 4.38 million existing homes sold in February, up by 9.5% from a month ago.

Given that February’s increase was the third in nine months, the housing market is likely moving away from the bottom that formed at the end of last year as interest rates peaked. The upside surprises from housing starts and permits this week was another sign of the market’s rebound.

The housing market is sensitive to interest rates, which influence long-term mortgage rates. With the Federal Reserve’s tightening campaign ended and rate cuts on the horizon, the market should continue to gain strength.

Sales grew for both single-family homes and multifamily homes, rising by 10.3% and 2.5%, respectively. The monthly supply of homes dropped to 2.9 months at the current selling pace, the lowest since March last year.

Prices should pick up as demand comes back. But supply remains lower than desired, which will complicate the inflation picture over the next year or so. Median prices grew by 5.7% from a year ago, the highest since November 2022. According to our estimate, housing inflation lags real-time housing prices by about 12 to 18 months.

Housing inflation, though, is poised to decline as price drops from 12 to 18 months ago indicated. But beyond that, the Fed will have to keep rates restrictive enough so that housing inflation won’t become a concern again.

The Federal Open Market Committee pointed to such a scenario this week with its projection of only two to three rate cuts next year. Those cuts would bring the terminal rate to about 3.9%, still much higher than the 2.5% neutral rate that the Fed is aiming for.