U.S. existing home sales declined more than expected in August, even as mortgage rates fell to their lowest levels in more than a year.

Last month, home sales tumbled 2.5 percent to a seasonally adjusted annual rate of 3.86 million units, according to new data from the National Association of Realtors (NAR) on Sept. 19. This is down from the July increase of 1.5 percent, which was upwardly revised from 1.3 percent.

The Trading Economics consensus estimate suggested a 0.9 percent gain, and a Reuters survey of economists forecasted home resales totaling 3.9 million units.

Median existing-home sales prices advanced 3.1 percent from a year ago to $416,700, the 14th straight month of year-over-year price gains.

Housing supplies continued to show signs of improving, with inventories totaling 1.35 million units at the end of August. This is up 0.7 percent monthly and nearly 23 percent from August 2023.

“Home sales were disappointing again in August, but the recent development of lower mortgage rates coupled with increasing inventory is a powerful combination that will provide the environment for sales to move higher in future months,” said NAR Chief Economist Lawrence Yun in a statement.

“The rise in inventory—and, more technically, the accompanying months’ supply—implies home buyers are in a much-improved position to find the right home and at more favorable prices.”

The latest data come after Freddie Mac’s Primary Mortgage Market Survey showed that the 30-year fixed-rate mortgage fell to 6.09 percent for the week ending Sept. 19. This is down 1.1 percent from a year ago and represents its lowest level since February 2023.

Lower mortgage rates could resuscitate housing activity as homeowners erect for-sale signs on their front lawns, potentially bolstering supply, and homebuyers garner more purchasing power.

For the first time in more than four years, the Federal Reserve slashed interest rates by 50 basis points and signaled more rate cuts ahead. The verdict is out on whether the central bank’s new easing cycle will influence mortgage rates moving forward.

The financial markets have already adjusted to the Fed’s policy path, and, as a result, “any further decline in mortgage rates will be minimal,” Yun stated.

“The Fed does not directly control mortgage rates, and the federal budget deficit is huge,” he said. “Future Fed rate cuts are not only anticipated but will not be as impactful because large federal borrowing will leave less capital available for mortgage lending.”

Mike Fratatoni, chief economist at the Mortgage Bankers Association, echoed this sentiment, noting that the mortgage market already telegraphed “this expected rate path.”

At the same time, 6 percent mortgage rates could spur purchasing activity and encourage more refinancing.

“We do expect that if mortgage rates remain near these levels, it will support a stronger than typical fall housing market and suggest that next spring could see a real rebound in activity,” Fratatoni said in a post-Fed meeting analysis.

US Home Prices In a Falling-Rate Climate

According to Goldman Sachs Research analysts, U.S. home price appreciation is expected to grow 4.5 percent in 2024 and 4.4 percent in 2025. This is up from the previous projection of 4.2 percent and 3.2 percent, respectively.

Prices have yet to come down because supply remains behind demand, a trend driven by various factors.

While interest rates are tumbling, many homeowners are apprehensive about listing their residential properties because of their mortgage rates. To cushion the economic blows from the pandemic, the Fed reduced rates to nearly 0 percent, allowing mortgage rates to plummet to around 3 percent and prompting homeowners to lock in these historically low rates.

Earlier this year, Redfin estimated that 89 percent of U.S. homeowners enjoy a mortgage rate below 6 percent.

Additionally, industry groups say that years of underbuilding are weighing on the real estate market.

A February report by Realtor.com projected that the U.S. is witnessing a housing shortfall of more than 7 million units, “the result of more than a decade of under-building relative to population growth.”

Fed Chair Jerome Powell told reporters that record home prices are not something the central bank can remedy with monetary policy, though lower rates could help bring stability to housing.

“I think as we normalize rates, you'll see the housing market normalize, and I mean ultimately by getting inflation broadly down and getting those rates normalized and getting the housing cycle normalized, that’s the best thing we can do for householders, and then the supply question will have to be dealt with by the market and also by government,” Powell said at the post-meeting press conference on Sept. 18.

Presidential candidates Vice President Kamala Harris and former President Donald Trump have both presented policies to improve housing affordability.

Harris has pledged to build 3 million new homes and provide down payment assistance to first-time homebuyers.

Trump wants to slash interest rates and eliminate “unnecessary regulations that raise housing costs.”