By Lucia Mutikani
WASHINGTON (Reuters) - U.S. existing home sales dropped to the lowest level in more than 13 years in October as the highest mortgage rates in two decades and a dearth of houses drove buyers from the market.
The report from the National Association of Realtors on Tuesday also showed that the median house price last month was the highest for any October. Barring a rebound in November and December, home resales this year are on track for their worst performance since 1992.
"The combination of high prices, high mortgage rates, and millions of homeowners unwilling to move, given they've locked in low rates, has frozen the market," said Robert Frick, corporate economist at Navy Federal Credit Union in Vienna, Virginia.
Existing home sales tumbled 4.1% last month to a seasonally adjusted annual rate of 3.79 million units, the lowest level since August 2010 when the sales were declining following the expiration of a government tax credit for homebuyers.
Home resales are counted at the closing of a contract. October's sales likely reflected contracts signed in the prior two months, when the average rate on the popular 30-year fixed-rate mortgage jumped to levels last seen in late 2000.
Economists polled by Reuters had forecast home sales would slide to a rate of 3.90 million units. Sales fell in the Northeast, West and the densely populated South. They were unchanged in the Midwest, the most affordable region.
Home resales, which account for a big chunk of U.S. housing sales, plunged 14.6% on a year-on-year basis in October.
The rate on the popular 30-year fixed-rate mortgage averaged 7.31% in the final week of September, before peaking at 7.79% in late October, the highest level since November 2000, according to data from mortgage finance agency Freddie Mac.
Though it has since retreated following data this month showing the labor market cooling and inflation subsiding, the rate averaged a still-high 7.44% last week.
Minutes of the Federal Reserve's Oct. 31-Nov. 1 meeting published on Tuesday showed that "a few participants observed that activity in the housing sector had flattened out in recent months, likely reflecting the effects of further increases in mortgage rates from already elevated levels."
The housing market has borne the brunt of the U.S. central bank's aggressive monetary policy tightening, with residential investment contracting for nine straight quarters, before rebounding in the third quarter, thanks to builders trying to take advantage of the housing shortage.
Stocks on Wall Street were trading lower. The dollar rose against a basket of currencies. U.S. Treasury prices were mixed.
There were 1.15 million previously owned homes on the market last month, down 5.7% from a year ago. Most homeowners have mortgage rates under 5%, making many reluctant to sell. Before the pandemic, there were nearly 2 million homes for sale.
Lawrence Yun, the NAR's chief economist, told reporters that realtors will be speaking with their representatives in the U.S. Congress about a government tax incentive for homeowners who have been living in their homes for a long period to encourage them to put their houses on the market.
Yun also noted that even if mortgage rates continued to slide, in tandem with U.S. 10-year Treasury yields, affordability would remain a challenge in the absence of adequate supply. The lack of previously owned houses is boosting demand for new homes.
At October's sales pace, it would take 3.6 months to exhaust the current inventory of existing homes, up from 3.3 months a year ago. A four-to-seven-month supply is viewed as a healthy balance between supply and demand. There is an acute shortage of houses in the $100,000-$250,000 price range.
Though builders have been breaking more ground on new housing projects, they are being constrained by the higher borrowing costs.
With supply still tight, multiple offers were the norm in some areas, keeping house prices on an upward trend on a year-over-year basis. The median existing house price rose 3.4% from a year earlier to $391,800, the highest for any October. About 28% of the homes sold last month were above the listing price.
Properties typically remained on the market for 23 days in October, up from 21 days a year ago. Sixty-six percent of homes sold in October were on the market for less than a month.
First-time buyers accounted for 28% of sales, as they did a year ago. This share is well below the 40% that economists and realtors say is needed for a robust housing market.
All-cash sales accounted for 29% of transactions compared to 26% a year ago. Distressed sales, including foreclosures, represented only 2% of transactions, virtually unchanged from the prior year.
"The odds of substantially improved sales in the near term remain very low," said Daniel Vielhaber, an economist at Nationwide in Columbus, Ohio. "Looking into the first half of 2024, supply promises to remain a significant roadblock as mortgage rates are expected to remain high."
(Reporting by Lucia Mutikani; Editing by Paul Simao and Chizu Nomiyama)