The US housing market continues to face significant pressure. Due to stubbornly high home prices and rising mortgage rates, existing home sales in July fell to their lowest level in three months, with potential buyers remaining on the sidelines as the market struggles to emerge from a prolonged downturn.

Data released Tuesday by the National Association of Realtors (NAR) showed that existing home sales declined 1.7% month-over-month in July to a seasonally adjusted annual rate of 4.06 million units. This figure matched the median estimate of economists surveyed. Since late 2022, the annualized rate of existing home sales has largely hovered around 4 million units, failing to achieve a sustained recovery.

While rising household incomes have somewhat improved housing affordability, the recent uptick in mortgage rates, combined with historically high prices, continues to curb demand. Housing financing costs have risen again this year. Since the Iran conflict erupted at the end of February, the 30-year fixed mortgage rate has climbed steadily, recently hitting a one-year high of 6.81%.

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NAR Chief Economist Lawrence Yun noted that despite rising mortgage rates over the past few months, home sales have remained "fairly stable." However, he added that if the average mortgage rate were to fall back to around 6%, the US housing market would undoubtedly become significantly more active.

The impact of high rates is particularly pronounced for homebuyers, as long-term mortgage commitments mean that even a rise of a few dozen basis points can significantly increase monthly payments. This implies that without a substantial drop in home prices, the renewed uptick in mortgage rates further weakens household purchasing power, keeping many potential buyers out of the market.

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In contrast to the cooling sales, US home prices continued to rise. Data showed that the median existing home sales price in July increased 2% year-over-year to $434,100, setting a record high for any July and extending the upward trend that began in the summer of 2023. Previously released data also indicated that the median home sales price in the second quarter rose 1.5% year-over-year, suggesting that despite high rates suppressing transaction activity, home prices nationwide have not yet shown a significant decline.

Inventory levels, which remain below pre-pandemic levels, are one reason for the resilience in home prices. Limited housing supply has made it difficult to generate enough pressure to drive a significant nationwide drop in prices, even in a weak demand environment. NAR data showed that the supply of existing homes for sale in July was 1.54 million units, down 0.6% year-over-year. Short inventory, combined with high prices and high rates, forms the central contradiction of the current US housing market. On one hand, potential buyers are constrained by financing costs; on the other, limited supply supports prices, preventing buyers from gaining significant relief through price declines.

First-time homebuyers are particularly affected. In July, first-time buyers accounted for 29% of all existing home sales, down from 33% in June. Since first-time buyers are typically more reliant on mortgages and have more limited funds for down payments, they are more sensitive to changes in interest rates and home prices.

However, compared to last year, housing affordability has shown some signs of improvement. Mark Fleming, Chief Economist at First American Financial, noted that as household income growth has outpaced home price increases, housing affordability has improved compared to a year ago. However, the recent resurgence in mortgage rates has eroded some of those gains. The NAR's Housing Affordability Index, released Tuesday, showed a 5.1% increase in July compared to the same period last year. This index measures whether a typical family income is sufficient to qualify for a mortgage on a median-priced home, indicating that the buyer's position has improved relative to price and income changes, although high financing costs remain a key factor restraining demand.

Regionally, existing home sales performance in July showed clear divergence. In the South, the largest home sales region in the US, sales fell 3.1% to a four-month low. Sales in the Midwest declined 2%, while the West was unchanged from the previous month. The Northeast, however, posted an increase.

Overall, the US housing market remains in a stalemate, characterized by high prices, high financing costs, and limited inventory. While income growth has provided some support for housing affordability, the 30-year mortgage rate rising to a one-year high of 6.81% has once again increased the cost of buying a home. Without a significant decline in mortgage rates or a substantial adjustment in home prices, existing home sales are likely to remain stuck in the low range of around 4 million units annualized that has persisted since late 2022.