Surging mortgage rates and price cuts stifle demand
The spring surge in mortgage rates has cooled demand for new homes, with sales in April falling below expectations, according to newly released government data.
Sales of newly built single-family homes were down 4.7% last month to a seasonally adjusted annual rate of 634,000 units, the Census Bureau and Department of Housing and Urban Development’s joint report showed.
The April figure came in well below expectations of 678,000 units and represented a pullback from March’s downwardly revised pace of 665,000. It marked the first monthly decline in new home sales since late last year.
INSERT NEW HOME SALES CHART
“The new-home market had been a relative bright spot in housing, but a variety of factors have converged to sap its momentum,” said Odeta Kushi (pictured), deputy chief economist of First American. “The spring surge in mortgage rates has dampened demand, even amid falling new-home prices and an uptick in new-home inventory, which reached its highest point since 2008. The impact is clear in April’s new-home sales, which came in below expectations and the March data was revised downward as well.”
Mortgage rates spiked in April to their highest levels since November, reducing affordability for buyers. The average rate on a 30-year fixed mortgage topped 6.9% during the month, according to Freddie Mac data.
Sweetening the deal
While higher borrowing costs dealt a blow to sales, builders have been using incentives like price cuts and mortgage rate buy-downs to help offset the affordability crunch. The median sales price for new houses sold in April was $433,500, down 1.4% from March though still nearly 4% higher than a year ago.
“The reasons behind the moderation of new-home prices may be that builders continue to offer price cuts to entice buyers,” Kushi said. “The NAHB reported that in May, about 25% of builders said they reduced prices. The average price reduction was 6%.”
In addition to discounting, construction firms are also downsizing the homes they build.
“Builders are adapting to the affordability crunch by building smaller homes,” Kushi noted. “According to first-quarter 2024 Census data, the median square footage of a new single-family home was the smallest since 2009.”
The inventory of newly constructed homes available for sale continued climbing in April, hitting 480,000 units. That represented 9.1 months’ supply at the current sales pace, the highest since November 2022.
“Homebuilders finished construction on new houses faster than they sold them in April,” added NerdWallet mortgage expert Holden Lewis. “The inventory of newly completed, but unsold, houses is growing. Look for builders to offer incentives, including rate buy-downs, to sell these homes this spring and summer.”
A bright spot
While higher mortgage rates weighed on sales last month, industry experts remain optimistic that the new home market can sustain its momentum relative to the existing home market.
“Builders continue to benefit from the lack of resale inventory and from their ability to use incentives, such as mortgage rate buydowns, to entice buyers off the sidelines,” Kushi said. “Builders have a huge competitive advantage over the resale market in this way. In the decade preceding the start of the pandemic, new-home sales made up approximately 9% of total home sales, today it’s more like 13%.”
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CoreLogic chief economist Selma Hepp agreed the fundamentals remain favorable for new home construction.
“New home sales are vitally important considering the continued shortage of homes in most markets and will continue to gradually increase with solid economic background and availability constraints in the existing market,” she said. “Also, the growth in new homes continues to be abetted by builders’ ability to offset falling housing affordability through price discounts, mortgage rate buy-downs, and similar incentives, which will keep the overall share of new home sales elevated. Overall, the fundamentals for the new home market remain robust and will help fuel sales over the next few years.”
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