The Slowdown in Existing Home Sales
FRBSF Economic Letter 2014-15 May 19, 2014
John Krainer



Sales of existing homes slowed noticeably over the second half of 2013, reflecting a more drawn-out recovery than expected for housing markets. A main reason for the slowdown is higher mortgage rates that have made financing more costly nationwide. Sales appear to be slowing even more in distressed markets, where real estate investors had bought up single-family homes to convert into rental properties following the housing bust. Evidence suggests that investors may be retreating from these markets as housing valuations rise.

Although the housing market appeared to be on the road to recovery in recent years, sales of existing homes slowed markedly over the second half of 2013. This Economic Letter takes a closer look at some of the possible reasons for this decline. Evidence shows that existing home sales are not that far out of line with predictions based on economic fundamentals. The primary explanation for the slowdown is an increase in mortgage interest rates, which has made financing more difficult for homebuyers.

In some markets, the slower sales have likely been accentuated by a retreat of investors buying single-family homes to convert into rental properties. Recent research shows that, although investors had invested heavily in distressed markets in past years, they may be pulling back as house values have increased in comparison with rental prices.

Figure 1
Existing single-family home sales by region

Existing single-family home sales by regionNote: Seasonally adjusted data indexed to 100 in July 2013.
Source: National Association of Realtors, Haver Analytics

The simple dynamics of existing home sales

Many indicators of housing market activity stalled over the second half of 2013, but the weakness is most evident in existing home sales. Sales of existing single-family homes reached a recent peak of 4.75 million units in July 2013, compared with the year before and adjusted for seasonal trends. Sales have fallen ever since. Figure 1 shows that the pattern of declining home sales has been broadly similar across different regions of the country. Sales in these regions all reached their peaks in July 2013 and then fell about 10% through October; the figure shows the regions indexed to 100 in July for comparison.

The fact that home sales in different parts of the country peaked and fell together suggests that some common underlying factors were at play. One such factor that could account for the decline in home sales is rising mortgage interest rates. Starting in May 2013, financial market participants became increasingly convinced that the Federal Reserve would soon taper its long-term asset purchases, and interest rates moved up. Mortgage rates in particular rose by nearly a full percentage point. Higher mortgage rates generally have a direct dampening effect on home sales, as buyers face constraints on the size of loans they can secure and on loan payments relative to their incomes. Since individual incomes likely did not rise over this short period, and house prices continued to grow in most regions, the rise in mortgage rates was expected to have an unambiguous negative impact on sales.

To gauge the effects of higher mortgage rates on home sales over time, I use a simple statistical model that relates existing home sales to past sales, past mortgage rates, and house price appreciation. I include past values of single-family construction permits to control for conditions in the market for new homes—a substitute for existing homes.

Figure 2
Dynamic simulation of home sales

Dynamic simulation of home sales

Figure 2 shows both actual data and dynamic simulations of existing home sales during the period of interest. The model simulations use seasonally adjusted monthly data through March 2013. Beyond that date, I use actual mortgage rates, house price appreciation, and building permits to predict sales of existing homes. This simulation is dynamic in the sense that the model predictions are based on past values of home sales, which themselves are predictions from early periods in the simulation. In the figure, the solid blue line shows the actual path of existing single-family home sales, and the dashed red line is the simulated path from the model. The dashed green line offers another simulation of what sales would have been if mortgage rates had remained at the low levels observed in April 2013.

Figure 2 shows that the model follows the actual data fairly well through May 2013, when mortgage rates began to climb. At this point, the model predicts that sales should have leveled off and then declined for a short time. In fact, actual sales jumped just as mortgage rates went up. This could reflect buyers rushing to complete transactions before mortgage rates increased more, or other shocks to the system that the model doesn’t account for. The statistical model captures about one-half of the decline in home sales from July to October 2013.

After October 2013, actual home sales continued to fall through the winter months, probably due in part to unusually severe winter conditions in many parts of the country. Note that the model anticipated that home sales would recover by this time. The factor behind this predicted sales growth is the strong appreciation of house prices that still persists. While higher house prices might be considered a deterrent to homebuyers, they actually can be a positive sign in the housing market. House price appreciation may boost confidence about future economic conditions for both buyers and sellers. In the data, the correlation between sales volumes and the level of house prices is significant and positive (see, for example, Krainer 2001).

The role of investors in distressed housing markets

The simulation I described is based on aggregate data and is intended to capture the historical movement of existing home sales in line with other economic conditions over a long period of time. Digging deeper and looking at specific market groups, we can invariably find times when relationships between these key variables change or other factors become important. One factor that may have become an important influence in the current market is the role played by real estate investors.

Typically, existing home sales are dominated by buyers who intend to live in the homes they purchase. In the wake of the foreclosure crisis, however, a surplus of housing became available for sale at heavily discounted prices. Opportunistic investors bought up many formerly owner-occupied units at this time and converted them into rental properties. These investors are generally less sensitive to mortgage rates or house prices than traditional buyers, which could have implications for future home sales.

How big a role real estate investors have played is still up for debate, but there is more consensus about which markets investors are most active in. Research by Molloy and Zarutskie (2013) identified and ranked investor activity in 2012 for 20 large metropolitan areas. They found a strong negative relation between investor presence and the ratio of house prices to rents; that is, markets where investors bought more houses coincided with areas where house prices were relatively lower compared with rental prices. Not only were investors attracted to markets that had high foreclosure rates and thus plenty of inventory for sale, they also were drawn to areas with relatively low home valuations that might be expected to rise.

To study how investors might have impacted sales in the housing market, I compare cities that Molloy and Zarutskie ranked in the top five by level of investor activity in 2012—specifically Atlanta, Las Vegas, Phoenix, Tampa Bay, and Charlotte—and low investor markets ranked in the bottom five—Seattle, San Francisco, Portland, Boston, and New York. Given these definitions, it is straightforward to assess the role of investors by tracking the differences in sales and other housing market variables in these different market groupings.

Figure 3
Total home sales by market type

Total home sales by market type

Figure 3 shows total monthly sales from Zillow for the top five and bottom five cities. I index the total sales levels to 100 in January 2012 to ease comparison across the two market types. The figure shows that much of the increase in nationwide sales throughout the first part of 2013 was actually absent in the high investor cities. Drilling down to the city level, Las Vegas and Phoenix show the most prominent change among the high investor markets; sales grew briskly there from 2008 to late 2011, possibly reflecting investors entering the market, but have declined steadily ever since. By contrast, current sales growth for markets with a low investor share actually appears to be stronger than for the nation as a whole. These markets also did not experience as pronounced a decline as high investor markets did in the wake of the mortgage interest rate hike in the summer of 2013.

Figure 4
Average house price to rent ratios by market type

Average house price to rent ratios by market type

Molloy and Zarutskie found that investors entered markets where house price-rent ratios were relatively low. Figure 4 shows that price-rent ratios grew more rapidly in these same markets where investors were most active. It is difficult to know whether the investor activity directly caused the price-rent ratios to go up in these markets, or whether prices in these markets have now fully recovered to the point that they are in line with rental prices and other fundamentals. Regardless, Figure 4 suggests that the expected profitability of a buy-and-rent strategy in these markets has likely declined over time. So it is quite plausible that investors have retreated from these formerly low-priced housing markets. It should also be noted that, with interest rates rising in the bond market over this period, yields on other financial assets may have become relatively more attractive compared with housing.


The analysis in this Economic Letter suggests that changes in fundamentals such as rising mortgage rates can account for much of the sluggishness in existing home sales over the past year. This drop-off in sales seems more pronounced in some markets where investors had previously been active, though these markets have been slowing for the past several years, even before mortgage rates began to rise. Further increases in future mortgage rates could dampen the recovery in existing home sales. It should be noted, however, that many other indicators of housing market activity—including housing starts and new home construction—remain significantly below what history would lead us to expect for this stage of the recovery. Thus, some other factors may be holding back home sales. For example, prospective homebuyers may have impaired access to credit, they may be underwater on their mortgages or have low home equity, or they may simply be reluctant to make large spending decisions when economic prospects are still somewhat uncertain. As the moderate recovery continues and these factors begin to dissipate, all forms of housing market activity, including existing home sales, should post more solid growth.

John Krainer is a senior economist in the Economic Research Department of the Federal Reserve Bank of San Francisco.


Krainer, John. 2001. “A Theory of Real Estate Liquidity.” Journal of Urban Economics 49, pp. 32–53.

Molloy, Raven, and Rebecca Zarutskie. 2013. “Business Investor Activity in the Single-Family-Housing Market.” Federal Reserve Board of Governors FEDS Notes, December 5.

Category: Real Estate, Think Tank

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9 Responses to “The Slowdown in Existing Home Sales”

  1. Moopheus says:

    Mortgage rates have been slowly falling again for the past few months, so should we now expect sales to perk up again? Rates are not down to the crazy-low levels we had a year ago, but they’re still pretty low. Surely anyone holding out for a better rate is going to be waiting a while.

    • Futuredome says:

      rates are irrelevant. New Home Sales will continue to grow as standards normalize. But Existing’s were at a above average pace that was completely investor created.

      They just flipped a couple around here to sellers in my neighborhood.

  2. stonedwino says:

    There has been no housing recovery…after the “all-cash buyers” and “investors” moved to the sidelines, we see what the real demand looks like – virtually non-existent. This is the new reality.

    How, when and to whom will current home owners sell their homes to? Gen Y? Millenials? LOL. Yeah…right.

  3. rj chicago says:

    Market remains very distorted.
    Several points herewith:
    a) Mark Hanson Advisers – he predicted this –
    see here
    here and

    b) The fragility of the buyer balance sheet – Buyers must not have equity nor enough income on the kitchen table balance sheet to withstand a 1% increase in interest rates. If my math is correct assuming the 1% on a 250,000 loan that translates to 2500 bucks a year or 208 bucks a month. Sheesh!!! Remember buyers want to know – what is this going to cost me on a month to month basis – how is this going to affect my monthly budget against fuel, food, clothes and the downloads on the I-pod;

    c) I wonder what will occur when the investor class reaches the threshold of their assumed ROI not reaching the level that they have come to expect – in other words I sense that once the O and M, taxes, and other incidentals of sustaining a property exceed the rent they can demand there will be a wholesale dumping of properties back on the market all at once. I think that Hanson has outlined this already as have other.

    d) Just heard yesterday an estimate that some 10 Million homeowners remain underwater – essentially stuck in their present abode. Not sure what this is in terms of total percentage of those who ‘own’ homes but my sense is the number is significant further impairing what ought to be a ‘normal’ market for housing.

  4. Futuredome says:

    Existing home sales have been goosed by cash for 4 years. Of course they are ‘falling’, but the quality is rising.

    Nothing to see here.

  5. @rj: Nice comments. I especially like the “fragile balance sheet” idea. I also share your concern about the risks of relying on “investor” demand to prop up sales volumes and prices.

    Some data to help your analysis (d): There are about 100-110 million households in the U.S. About 60% are owners and the others rent. Let’s say 70 million owners. About 2/3 of the owners have mortgages. Let’s say 50 million. Of these, there are the estimated 10 million who are underwater outright. But there are another estimated 10 million or so who haven’t got enough equity/savings to make a fresh downpayment and cover realtor fees and closing costs, so although they’re not underwater, they aren’t able to move easily either. This impairs “move up” buying.

    Add to the mix that there are now since 2008 an additional $1 trillion in student loan debts piled on top of younger potential “first time” buyers, and consider how that affects affordability.

    Finally, there’s also the possibility of a secular change in how Americans view housing purchases, driven by the combination of low rates, high prices and stagnant incomes and their effect on transaction costs relative to income. Buyers may be less inclined to move frequently than they used to be.

    For instance, in the past decade, folks have been buying houses at 4-5x annual income. At those price levels, the 6-10% transaction costs (realtor fees, taxes, moving costs, redecorating costs etc.) are a full 25-50% of annual income. That’s a very high cost for just moving up or moving around. Meanwhile, incomes have been stagnant, so rising incomes aren’t lightening the burden.

    By contrast, previous generations (who bought during times of higher interest rates and lower prices) paid maybe 2x income for a house. At higher rates, the interest payment dominated the mortgage. As rates fell and home prices rose, it was easier to sell and move up, because equity built up and the carrying cost of the larger mortgage for the larger home was no worse than the existing mortgage for the existing home. And, in addition, because the price was only 2x income, the costs to sell and move were only 12-20% of income, which is a lot more manageable. This was especially true because inflation and economic growth were pushing up the income at the same time.

    So I think a lot of older folks got used to being able to move every few years, because the market trends left them with plenty of room in their budgets. But nowadays, with prices stuck on “high” and rates low, all the market tailwinds are gone. So overall demand may run below historical levels for some time to come.

    • kaleberg says:

      “Finally, there’s also the possibility of a secular change in how Americans view housing purchases …”

      I read a book by some English guy in the 1960s who was buying a house. His parents, who had survived the Great Depression, told him “Why put your money into bricks and mortar. You’ll just have to give it back to the bank when the times get hard.” Of course, he was right to buy in the 1960s, but it may be that now his parents are right again.

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  7. lucas says:

    “…Although the housing market appeared to be on the road to recovery in recent years…” No one has adequately explained why the terminology related to housing is so wrong. When there is a fever (bubble), recovery means the fever breaks to normal. That means the fever (prices) go down. In many places, the fever is still too high and people are wishing for a relapse. It seems very odd that people call a relapse “recovery.” I do not think housing can be properly understood until we get the terminology straight.