Sales of existing homes rose in July as house hunters returned to the market with mortgage rates at their lowest levels since February.

Existing home sales advanced 1.3% from June to a seasonally adjusted annual rate of 3.95 million, the National Association of Realtors said Thursday, stopping a four-month sales decline that began in March. Economists polled by Bloomberg expected existing sales to hit a pace of 3.94 million in July.

On a yearly basis, sales of previously owned homes dropped 2.5% in July. The median home price climbed 4.2% in July to $422,600, the 13th straight month of annual price increases.

A combination of limited inventory, rising prices, and high mortgage rates continue to weigh on housing activity.

“Despite the modest gain, home sales are still sluggish,” NAR chief economist Lawrence Yun said in a statement. “But consumers are definitely seeing more choices, and affordability is improving due to lower interest rates.”

No relief in home prices

Lower mortgage rates will likely ease affordability challenges for homebuyers in the coming months, but Thursday's report shows sticker shock isn't going away as a feature of the US housing market.

In the Northeast, home sales increased 4.3% from a month ago to an annual rate of 490,000 in July while average home price was $505,100, up 8.3% from last year.

Sales in the South advanced 1.1% from June, while the median price in the South was $372,500, up 2.3% from one year ago.

In the West, existing home sales rose 1.4% month over month. The median price was $629,500, up 3.4% from July 2023.

Meanwhile, sales in the Midwest were unchanged from June at 920,000 units, with homes sold at a median price of was $321,300, up 4.5% from July 2023.

The inventory of unsold existing homes slightly increased 0.8% from one month ago to 1.33 million units at the end of July, equal to 4 months of supply at the current sales pace. At least six months are required for a balanced market.

The increase in activity may have been partly due to lower mortgage rates. The average rate on the 30-year fixed-rate mortgage was 6.49% as of last week, according to Freddie Mac.

Although mortgage rates are lower than a year ago, some prospective homeowners have remained hesitant to venture back into the housing market, anticipating even lower rates. A dynamic that is leaving some companies cautious about the prospects for a sharp rebound in activity in the coming months.

“We are hopeful that the lower rates, the drops that we're seeing, are going to have a dual impact of one, relieving pressure on consumers; and then secondly, driving the existing home sales activity. But the reality is when we look at the lock-in effect, the majority of homeowners are still at 4%,” Lowe’s (LOW) CFO Brandon Sink said on Tuesday during their second quarter earnings.

"So even if we do see some level of decrease [in mortgage rates], we do believe there still may be a reluctance to engage."

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

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