US Housing Market Faces Growing Pressure as Home Price Cuts Hit Decade-High Levels

The US housing market is showing increasing signs of stress, with home price reductions reaching their highest level in over a decade. A new report from Altos Research highlights growing softness in the real estate sector, which remains under pressure from high mortgage rates and shifting economic conditions.

While many economists and investors focus on inflation, labor markets, and corporate earnings, housing remains a critical yet often underappreciated risk to the broader economy. The combination of rising inventory, slowing demand, and limited affordability is creating headwinds that could have significant economic implications in the months ahead.

Signs of Weakness in the Housing Market

Several key indicators suggest that the housing sector is weakening:

- Immediate sales have declined by 30 percent year-over-year. This metric reflects the number of homes going under contract within days of hitting the market, which is a strong indicator of buyer demand. The sharp decline suggests that the urgency among buyers has faded.

- Housing inventory is up 27.8 percent from last year. While inventory levels are still below pre-pandemic norms, the increase signals a shift in the market from the extreme supply shortages seen in 2021 and 2022. More homes on the market mean buyers have more options, reducing competition and putting downward pressure on prices.

- New home contracts are down 5 percent year-over-year. In the most recent data, 57,000 new contracts were signed for single-family homes, a decline from the same period last year. This suggests that buyer activity is softening despite seasonal trends that typically see stronger activity in the spring.

- Seventeen percent of mortgage holders are paying over 6 percent interest. During the pandemic, homeowners locked in historically low mortgage rates, some as low as 2.8 percent. With the 30-year fixed rate now hovering around 6.9 percent, affordability has been significantly impacted for new buyers.

Why Housing Weakness Matters for the Economy

The housing market is a key driver of economic activity. When home sales slow, so do industries tied to real estate, including construction, home improvement, and mortgage lending. Consumer spending can also take a hit, as rising home values often support consumer confidence and borrowing capacity.

Several factors are contributing to the current weakness in housing:

1. Mortgage Rates Remain Elevated

- The Federal Reserve's aggressive rate hikes in 2022 and 2023 pushed mortgage rates sharply higher. While inflation has moderated, the Fed has yet to signal aggressive rate cuts, keeping borrowing costs high.

- Even if the Fed does cut rates in 2025, the impact on mortgage rates may be gradual, limiting any immediate relief for potential homebuyers.

2. Affordability Challenges

- Home prices remain historically high relative to wages, and many buyers have been priced out of the market.

- The typical monthly mortgage payment for a median-priced home has risen by nearly 50 percent compared to pre-pandemic levels, making homeownership increasingly unattainable for first-time buyers.

3. Economic Uncertainty and Buyer Caution

- Many consumers are holding off on major purchases due to economic uncertainty, particularly as the 2024 election cycle brings potential policy shifts.

- High inflation in areas like food and energy is also limiting discretionary spending, reducing demand for large financial commitments like home purchases.

Potential Risks and the Path Forward

While some indicators suggest the housing market could stabilize, risks remain. If economic conditions worsen or the labor market softens, the decline in home prices could accelerate.

Key factors to watch include:

- Fed Policy Decisions: If the Federal Reserve signals a shift toward easing and mortgage rates fall, buyer demand could recover.

- Inventory Trends: A continued rise in unsold homes could push prices lower, creating potential buying opportunities but also impacting homeowners looking to sell.

- New Home Construction: Builders have been reluctant to flood the market with inventory, but if new housing supply surges, it could further weigh on prices.

For now, the housing market remains in a precarious position, with high rates suppressing demand and price cuts increasing as sellers adjust to new market realities. Investors and policymakers should keep a close eye on housing data in the coming months, as it may offer key insights into broader economic trends.