US existing home sales continued to stagnate in July. Transaction volumes fell to a three-month low, as elevated home prices and borrowing costs deterred a large number of potential buyers, with the market hovering near an annualized rate of 4 million units since late 2022.

Data from the National Association of Realtors (NAR) released on Tuesday showed that the closing volume of existing home sales contracts in July decreased by 1.7% month-over-month, translating to a seasonally adjusted annual rate of 4.06 million units, matching the median estimate from economists surveyed by Bloomberg.

Meanwhile, the median price of existing homes sold in July rose 2% year-over-year to $434,100, setting a record high for the month of July. The 30-year fixed mortgage rate has been climbing since late February, recently reaching a one-year high of 6.81%.

NAR Chief Economist Lawrence Yun noted that "existing home sales have shown considerable stability in the face of rising mortgage rates over the past few months," and suggested that "if the 30-year mortgage rate can fall back to around 6%, the housing market will undoubtedly see a clear recovery." However, based on current trends, this outlook appears difficult to achieve.

Mortgage rates climb to a one-year high, fueling buyer hesitation

The rising cost of mortgage financing is a key factor dampening existing home sales. The 30-year fixed mortgage rate has been increasing since late February, recently hitting a one-year high of 6.81%.

Combined with high prices, these rising costs are keeping many potential buyers on the sidelines. NAR data shows that first-time buyers accounted for only 29% of existing home sales in July, a significant drop from 33% in the previous month, indicating that this group, which is most sensitive to interest rates, is rapidly withdrawing from the market.

Since late 2022, the annualized rate of US existing home sales has been stuck around 4 million units, with the market awaiting a catalyst for a sustained rebound that has not yet materialized.

Inventory shortages persist, with upward price pressure remaining

The supply side has also failed to provide support. Existing home inventory in July decreased slightly by 0.6% year-over-year to 1.54 million units, still below pre-pandemic levels. This limited supply of homes continues to push up transaction prices.

The July median price of $434,100 not only set a record for the month but also continued the trend of year-over-year price increases that began in the summer of 2023. Another report released earlier also showed that the national median existing home price in the second quarter rose 1.5% year-over-year.

Regionally, sales in the South, the largest market for existing homes, fell 3.1% month-over-month in July to a four-month low. Sales in the Midwest decreased by 2%, remained flat in the West, and saw a slight increase in the Northeast.

Affordability shows slight improvement, but rate increases have eroded some gains

Despite the overall pressure, affordability indicators showed marginal signs of improvement. The NAR Housing Affordability Index, a composite measure of whether a typical family's income is sufficient to qualify for a mortgage on a median-priced home, rose 5.1% year-over-year in July.

Mark Fleming, Chief Economist at First American Financial Corp., recently noted that as household income growth has generally outpaced home price increases, the tightness in housing affordability across the US has eased compared to last year. However, he also cautioned that the recent rise in mortgage rates has partially eroded these improvements.

Against the backdrop of high borrowing costs and persistently tight inventory, the US existing home market is unlikely to break out of its sluggish pattern in the near term. The recovery outlook remains dependent on a substantial shift in the direction of interest rates.