Slowing sales ease housing price growth, with prices falling in some places

Article originally posted on CoStar on July 2, 2025

An already sluggish for-sale housing market is facing a slower summer, recent data shows.

With borrowing costs still high, potential homebuyers are pulling back, leaving a growing inventory of unsold houses and weakening price growth, leading homebuilders to put the brakes on new construction.

Softer sales of existing homes, which account for roughly 85% of total sales, have been the primary weight on the market since late 2022. That was when mortgage rates surged to around 7%, where they have hovered since.

As a result, inventory plummeted as homeowners with lower fixed-rate mortgages hunkered down, leading to fewer listings and a 25% plunge in existing home sales, which fell to 4.03 million on an annualized basis in May 2025, compared to the five-year pre-pandemic average of 5.4 million.

More recently, challenges have spread to the new home sales market, reflecting softening demand in addition to existing home supply constraints. According to the U.S. Census Bureau, new home sales fell to 623,000 in May, a 13.7% drop from April that offset the sizeable gain in the prior month.

The numbers have seesawed from month to month since mid-2023, but the overall trend has been largely flat. Nevertheless, as a share of overall home sales, new home sales have grown since the pandemic struck, with average monthly sales since mid-2023 of 675,000 compared to their five-year pre-pandemic average of roughly 595,000.

Those newly constructed units are staying on the market longer, and the 507,000 new homes for sale represented the largest inventory of new homes for sale since October 2007. The current sales pace represents 9.8 months of new home inventory. Aside from the third quarter of 2022, when mortgage rates initially surged, May’s inventory reading is the highest since April 2009.

Existing homes, too, are staying on the market longer. With about 1.54 million existing homes for sale in May, total inventory was up 20% over the year, though still 18% below the pre-pandemic average of 1.87 million.

As demand has cooled and the supply of homes for sale has grown, the growth in housing prices has slowed. The S&P CoreLogic Case-Shiller home price index rose just 2.7% in April over the prior year, its third-consecutive month of easing and its smallest gain since August 2023. Similarly, the Federal Housing Finance Agency’s Purchase-Only national index rose by 3.1%, its third-straight month of slowing and its smallest gain in two years. Over the previous month, both indices rose by 0.6%.

Sun Belt markets, which saw substantial supply increases as pandemic-era migration boosted demand, are now witnessing monthly price declines, a relief after the double-digit price increases a few years ago. In the meantime, markets in the Northeast and the Midwest are still experiencing price gains.

The combination of intensifying supply concerns and deteriorating demand conditions is weighing on homebuilder sentiment. The National Association of Home Builders and Wells Fargo’s monthly survey of home builders in June reported the lowest sentiment score for home builders since December 2022. Though June’s index score of 32 was half the pre-pandemic average of 2015 through 2019, it was double the average of 16 from 2008 through 2011 in the aftermath of the global financial crisis. Sagging sentiment is showing up in construction numbers as permits, starts and completions are stagnating or declining.

In addition to fading demand and higher inventories of unsold housing, builders also face higher materials costs. Though offset somewhat by lower energy prices, construction material commodities, particularly metals, have begun to tick higher, likely due to trade policy. After a year of annual declines, the construction-materials portion of the Bureau of Labor Statistics’ producer price index began to rise again in February and reached a 4.3% yearly increase in May.

The Federal Reserve’s monetary tightening program began in 2022 in response to surging inflation, to which higher housing prices contributed. Inflation has since receded, yet interest rates remain elevated. This combination could be bringing the housing market into better balance, as supply rises and demand slows, yielding slower price gains.

The Federal Reserve is expected to lower its target interest rate later this year, which may lower financing costs and boost housing demand again. The current supply overhang could come in handy in that event.