Rising mortgage rates and supply chain concerns put pressure on new home construction
New home sales in the US dropped to a three-month low in January, reflecting affordability concerns, harsh winter weather, and increasing uncertainty among builders.
Purchases of new single-family homes fell 10.5% to an annualized rate of 657,000, according to government data released Wednesday. The figure fell short of economists’ expectations of 680,000, as surveyed by Bloomberg.
Sales declined sharply in the South, the country’s largest homebuilding region, where record snowfall contributed to a nearly 15% drop in new home purchases. The Midwest and Northeast also saw steep declines, while the West was the only region where sales improved.
The housing market remains under pressure due to high home prices and elevated mortgage rates. Builders, who initially welcomed expectations of reduced regulations under President Donald Trump, are now bracing for higher costs due to potential tariffs.
“Home builders are struggling to find buyers in this era of high mortgage rates,” said Holden Lewis, home and mortgage expert at NerdWallet. “Builders offer incentives such as interest rate buydowns. But the ultimate incentive is an affordable price, and builders failed to appeal to entry-level buyers in January. Just 41% of new homes were sold for less than $400,000. A year before, that figure was 43%.”
While mortgage rates dropped to 6.88% last week, the lowest level this year, they remain more than double the late-2021 rates, discouraging many potential homebuyers. Home-buying applications are still hovering near 1990s levels, according to Mortgage Bankers Association data.
With home sales slowing and inventory rising, some builders are scaling back construction. Both PulteGroup Inc. and Toll Brothers Inc. noted in recent earnings calls that they have more spec homes, houses built without a committed buyer, than usual. As a result, both companies plan to cut back on new projects in the coming months.
First American deputy chief economist Odeta Kushi pointed out that builder sentiment has worsened significantly.
“Builders face both headwinds and tailwinds as they head into 2025,” First American deputy chief economist Odeta Kushi noted. “Builder sentiment fell in February to its lowest level since September. Optimism about single-family sales expectations for the next six months plummeted by 13 points, marking the largest one-month decline since the early months of the COVID-19 pandemic.”
Builders remain caught between supply shortages and affordability concerns. The chronic housing shortage and the so-called "seller’s strike," in which homeowners stay put due to high mortgage rates, have supported demand for new homes.
“Additionally, existing-home inventory has picked up, and as it expands, builders’ relative supply advantage wanes,” Kushi added. “The share of total inventory made up by new homes remains elevated compared to historic norms, but has leveled out in recent months.”
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New-home sales offer a more up-to-date snapshot of housing demand than existing-home sales, which are recorded when contracts close. However, these figures can be volatile. The government’s report indicated a 90% confidence range, suggesting that new-home sales could have fallen by as much as 30.4% or increased by 9.4%.
The National Association of Realtors will provide further insights into the existing-home market when it releases its January pending home sales report on Thursday. This data, which tracks contract signings, tend to be a key indicator of future home sales trends.
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