Sales of existing homes fell in August as house hunters remained on the sidelines despite mortgage rates hitting their lowest level in over a year.

Existing home sales dropped 2.5% from July to a seasonally adjusted annual rate of 3.86 million, the National Association of Realtors said Thursday, the lowest level since October. Economists polled by Bloomberg expected existing home sales to hit a pace of 3.9 million in August.

Read more: Is this a good time to buy a house?

On a yearly basis, sales of previously owned homes retreated 4.2% in August. The median home price increased 3.1% from last August to $416,700, the 14th consecutive month of annual price increases.

The combination of scarce inventory, escalating prices, and elevated mortgage rates continue to weigh on sales activity — for now.

“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,” NAR chief economist Lawrence Yun said in a press release.

However, economists at Fannie Mae don’t expect sales activity to turn around this year despite lower mortgage rates.

We “expect 2024 existing home sales to fall to the slowest annual pace since 1995," they said.

After the Federal Reserve cut interest rates by a half percentage point Wednesday, Fed Chair Jerome Powell said in a press conference that the housing market is "partly frozen because of the lock-in with low rates."

Lower mortgage rates could ease affordability constraints for homebuyers in the coming months after the Fed's rate decision. But the "real issue with housing is that we have had and are on track to continue to have not enough housing," Powell said, noting the Fed couldn't fix the dilemma.

Read more: How the Federal Reserve rate decision affects mortgage rates

Indeed, Thursday's report showed that elevated home prices are putting off potential buyers, especially entry-level ones.

Last month, first-time buyers were responsible for 26% of sales — matching the all-time low last seen in November 2021 — and down from 29% in both July 2024 and August 2023.

The inventory of unsold homes improved by 0.7% from one month ago to 1.35 million units at the end of August, equal to 4.2 months of supply at the current sales pace. Six months signals a balanced market.

Dani Romero is a reporter for Yahoo Finance. Follow her on X @daniromerotv.

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