U.S. existing home sales recorded an unexpected increase in February, supported by declining mortgage rates and slower house price growth that encouraged buyers to return to the housing market. However, limited housing supply could still restrict activity during the upcoming spring selling season.
According to a report released Tuesday by the National Association of Realtors (NAR), the latest data offers modest optimism for a gradual housing market recovery. Housing affordability has improved slightly, and the share of first-time buyers reached its highest level in five years. With affordability pressures still affecting millions of Americans, the housing market has also become a key political issue ahead of the November midterm elections.
Despite February’s rise in home sales, economists caution that the housing market has not yet fully stabilized. Ongoing geopolitical tensions in the Middle East could push inflation higher, potentially leading to increased mortgage rates. The conflict between the United States, Israel, and Iran also poses broader economic risks, including weaker labor demand and declining household wealth due to volatility in financial markets.
Charlie Dougherty, senior economist at Wells Fargo, noted that affordability remains a major constraint for many buyers. While conditions have improved slightly, he expects homebuying activity to recover slowly throughout the year due to continued affordability challenges.
Existing home sales rose 1.7% in February to a seasonally adjusted annual rate of 4.09 million units. Data for January was revised upward, showing sales at a pace of 4.02 million units rather than the previously reported 3.91 million.
Economists surveyed by Reuters had expected home resales to fall to an annual pace of 3.89 million units. The February figures likely reflect purchase agreements signed in December and January, when mortgage rates began trending downward.
Severe winter weather also influenced regional sales patterns. Heavy snow and extremely cold temperatures disrupted housing activity in the Northeast, where sales dropped 6%. In contrast, sales rose strongly in the West by 8.2%, while the South recorded a 1.6% increase and the Midwest posted a 1.1% gain.
On an annual basis, overall existing home sales still declined by 1.4%. Meanwhile, the median price of existing homes rose slightly by 0.3% compared with a year earlier, reaching $398,000.
The National Association of Realtors reported that its Housing Affordability Index increased to 117.6 in February, up from 117.1 in January and significantly higher than 103.1 recorded a year earlier. Affordability improved across all regions compared with last year, with the most notable gains occurring in the West and South.
Mortgage rates decline but further drops may be limited
The improvement in housing affordability was largely driven by falling mortgage rates this year. Mortgage rates declined partly after President Donald Trump instructed the Federal Housing Finance Agency (FHFA) to purchase bonds issued by major mortgage finance companies Freddie Mac and Fannie Mae, both of which are overseen by the FHFA.
However, the potential for additional mortgage rate declines may be limited due to rising U.S. Treasury yields, partly driven by geopolitical tensions in the Middle East. Mortgage rates typically follow the direction of the benchmark 10-year Treasury yield.
Data from Freddie Mac shows that the average 30-year fixed mortgage rate stood at 6% last week. It had fallen to 5.98% the week before tensions in the Middle East escalated.
Housing supply remains tight despite a modest increase in available inventory. The number of existing homes on the market rose 2.4% to 1.29 million units in February, still well below the pre-pandemic range of 1.5 million to 1.6 million homes.
Inventory increased 4.9% compared with a year earlier. At the current sales pace, it would take approximately 3.8 months to sell all available homes on the market, slightly higher than the 3.6 months recorded one year ago.
If housing supply fails to expand during the busy spring selling season, home prices could rise further. Much of the supply shortage continues to affect entry-level homes, which remain in high demand.
Nearly 45.5% of homes sold in February were priced between $250,000 and $500,000. Meanwhile, sales of homes priced below $250,000 declined compared with a year earlier.
Heather Long, chief economist at Navy Federal Credit Union, said many Americans continue to face affordability pressures as home prices remain elevated. She emphasized the need for increased construction of starter homes to improve accessibility for first-time buyers.
The median time homes spent on the market increased to 47 days, compared with 42 days a year earlier.
First-time buyers accounted for 34% of total home purchases, up from 31% a year earlier. Economists generally believe that a healthy housing market requires first-time buyers to represent around 40% of total transactions.
All-cash purchases represented 31% of total sales, slightly down from 32% a year earlier. Distressed sales, including foreclosures, accounted for 3% of transactions. Although unchanged from last year, distressed sales have typically averaged closer to 2% in recent years.
Lawrence Yun, chief economist at the National Association of Realtors, noted that distressed sales remain relatively low because many homeowners still hold significant housing equity. As a result, homeowners facing financial pressure are often able to sell their properties through traditional sales rather than defaulting on their mortgages.
