When will home sales finally return to normal?

The real estate industry is still reeling from four years of desperately slow home sales. The transaction is the unit upon which everyone gets paid. Whether sale commission, mortgage origination, insurance, movers, appliances or furniture — everything happens when the house is bought. Four years after the pandemic boom, the housing industry is still 30% smaller than it was. 

Forget returning to the boom times, everyone wants to know simply when do we finally get back to normal?

And what is “normal” anyway? Thanks to many years of NAR publishing its Existing Home Sales data series, we have a standard framework for talking about normal levels of home sales. 

The NAR seasonally adjusted annual rate (SAAR) of sales has averaged around 5 million for the last 15 years. The pace hit a peak of 6.2 million in July 2021 during the cheap money and work-from-home pandemic frenzy. Record low interest rates created payment affordability never before seen for homebuyers. Americans responded by buying everything in sight. 

But then the market changed. Rates surged in response to inflation. Home prices didn’t crash but the pace of sales cratered down to roughly 4 million, down 35% from the peak. The sales rate has stayed at this level for over three years now with barely a budge higher. In the NAR numbers, May 2026 existing home sales came in at 4.2 million, up slightly from April and roughly 3% faster than a year ago.

Mortgage rate lock-in effect

One reason that home sales have stayed so low is what’s known as the mortgage rate lock-in effect. Mortgage rate lock-in is felt when the available interest rate on a new mortgage is substantially higher than the rate you’re currently paying on your existing mortgage. In these times, if you move — even for the same priced house — your payment increases. As a result, many of us choose not to move. We feel locked-in to our low payments. 

The decade of the 2010s held mortgage rates very low. As a result, a generation of homebuyers (and refinancers) availed themselves of very low mortgage payments. The 2010s were a tremendous time to buy real estate. Unfortunately, now those homeowners are locked-in. 

Compass economist Jonah Coste was a lead author on the 2024 research that illustrates just how potent the lock-in effect is. Coste now calculates that in 2026 these conditions are preventing 870,000 homes sales that would otherwise take place if these rate conditions weren’t so extreme. That’s the difference between a stifled housing market and a normal one.

When do sales finally return to normal?

It’s easy to conclude that if interest rates drop substantially, that would solve a lot of problems in the housing market. And, yes, if mortgage rates were to drop to 4% again, we’ll all buy more homes. 

In light of current macroeconomic conditions, I think it’s more prudent to ask, what if rates don’t fall soon? When will home sales finally return to normal?

Coste’s research tells us how quickly the lock-in effect “decays.” Over time, some people sell the cheaply financed homes, new buyers have expensive mortgages and they’re not locked-in at all. The average rate on all the outstanding mortgages climbs every day. From a low of 3.8% average on all outstanding mortgages in Q2 2022, the outstanding rate has steadily climbed to 4.5% now. The lock-in effect cures itself slowly over time as rates stay higher. 

How many sales get unlocked each year? Coste’s research shows that about 5.8% of those locked-in homes get unlocked through normal demographic and economic activity. The 870,000 sales which are prevented in 2026 becomes 820,000 sales prevented in 2027.

I’ve translated Coste’s lock-in-decay equations into a chart that helps us see when normalcy finally returns to the US housing market. In this view, we see how even if mortgage rates don’t go below the current 6.5%, we have some growth in the industry. 

If we get lucky and mortgage rates fall into the 5s, that stimulates a lot more sales. Fewer people are locked-in. This chart shows how many potential home sales would be possible, assuming nothing else changes in the economy.

But of course other variables do change in the economy. Interest rates move up and down. Employment and incomes can grow. If mortgage rates dip to 5.5%, sales accelerate much faster. While it seems unlikely, a decline of 2.5% from current levels would effectively eliminate lock-in entirely (and create a new generation of locked-in homeowners.)

Back to the question of when home sales finally return to normal. The reality is likely some combination of the natural decay of the lock-in effect and economic conditions which lower mortgage rates gradually or at certain moments. That’s why this chart is handy. We can expect natural growth in home sales each year in the near future — even if mortgage rates don’t decline at all. However, in those moments when rates do ease lower, that lock-in effect also eases and we start to grow back into a market that looks more “normal” in the next few years.