As mortgage rates experience a retreat from recent peaks, a glimmer of hope emerges for home buyers. However, a new challenge is taking center stage, adding complexity to the real estate landscape.

In October, as mortgage rates approached nearly 8%, home buyers hesitated, leading to a notable decline in contract signings. The National Association of REALTORS® (NAR) revealed that its Pending Home Sales Index, a forward-looking indicator based on contract signings, dropped 1.5%, marking the lowest point since the index’s inception in 2001. Compared to the previous year, pending home sales were down by 8.5%.

While a turnaround may be on the horizon with a recent drop in mortgage rates—the 30-year fixed-rate mortgage averaged 7.29% for the week ending Nov. 22—another formidable obstacle has emerged: a scarcity of available homes for purchase.

Lawrence Yun, Chief Economist at NAR, notes that despite the easing of borrowing costs, potential buyers are now grappling with the challenge of finding suitable homes. The limited housing inventory is hindering the fulfillment of housing demand, with multiple offers on properties becoming a common scenario. Yun emphasizes that while lower mortgage rates qualify more buyers, the scarcity of housing options remains a significant bottleneck. This shortage is particularly pronounced in the starter and mid-priced home segments.

The competitive landscape is evident, even in the face of a slowdown in overall home sales. Multiple offers persist due to low inventory, and many existing homeowners are hesitant to list their properties. Yun underscores that areas with increased housing inventory are witnessing a rise in home sales. For instance, sales of properties priced above $750,000 have surpassed the previous year’s figures due to a more abundant inventory at that price point. Additionally, newly built home sales have seen a 4.5% increase compared to the previous year, as builders can offer a broader range of choices than the existing home market.

Yun emphasizes the importance of addressing the housing supply issue across the nation. Boosting housing supply in all regions is crucial to meeting demand in the coming months.

Existing home inventory, already at historically low levels, was 5.7% below the previous year’s levels in October, according to NAR’s data. Properties that do hit the market are swiftly purchased, with 66% of existing homes sold in October spending less than a month on the market. The average time on the market for properties in October was just 23 days.

In terms of regional variations, the Northeast was the only U.S. region to experience a rise in home sales activity in October. In contrast, the rest of the country saw a decline in contract signings, led by the West. All major regions are witnessing a slowdown in sales compared to the previous year.