New home sales surge

August 23, 2023

New home sales, which are recorded at the contract signing, spiked 4.4% in July. Sales are now at the highest pace since February 2022, before the Fed embarked on its rate hiking regime. Sales were driven by strong activity in the Midwest and West.

The newly built market has been detached from the traditional resale market; high prices and rising mortgage rates are not enough to derail the strong demand for newly built homes at a time when housing is severely undersupplied. Builders are offering discounts and mortgage rate buydowns to bring in buyers.

Newly built homes now account for about a third of all homes available on the market; historically the figure was about half of that. Additionally, at the current sales pace, the newly built market has 7.3 months of supply, which is slightly higher than the six months needed to clear the market. In comparison, the resale market has 3.3 months of supply.

Existing home sales, which are captured at the contract closing, fell 2.2% in July to the lowest level since January. Sales have been falling four out of the last five months, reflecting both the lack of supply and softening demand from rising mortgage rates. Housing affordability, as measured by the National Association of Realtors, has fallen to the lowest level since 1985, when mortgage rates were above 12%. Back then, the median sales price of a single-family home was $74,000 (adjusted for inflation, it was $209,000). In July, the median sales price was $412,300.

According to Freddie Mac, the 30-year fixed mortgage rate was hovering just below 7% in July and crossed the 7% threshold in early August. The last time the mortgage rate hit above 7% was in October and November of 2022; three months later, the resale housing market hit its lowest level of sales in 13 years and then rebounded shortly after. There could be a second bottoming out of sales if the mortgage rate remains above 7% for another week, or longer.

Mortgage applications to purchase a home fell on a weekly basis for the entire month of July and are in even worse shape in the first half of August. Applications are 30% below year-ago levels and sitting at the lowest level since 1995. Applications are not expected to rebound until mortgage rates cool below their 7% pace, as that appears to be the threshold that many would-be buyers cannot stomach.