New home sales benefitted from builder buydowns
Mortgage rates are expected to remain high through the end of the year as credit tightens.
New home sales, which are captured at the contract signing, popped 9.6% in March to the highest level since March of 2022. February sales were revised lower. About a quarter of homes sold were not yet started; this is where cancellations could show up. Builders are more sensitive to market forces than home sellers; they’ve been able to offer mortgage rate buydowns and other discounts to lure buyers.
Higher costs stemming from material and worker shortages, regulation, land-use restrictions and rising financing costs mean that builders have been focused on wealthier buyers. This has helped alleviate supply pressures for the move-up or second home buyers, but not for first-time buyers. About 90% of new homes sold were above $300,000; about 75% of all sales were above that threshold in 2021.
New homes available for sale make up about a third of all inventory on the market. That is about three times the historical average; the result has left first-time buyers, where pent-up demand among millennials is greatest, on the sidelines.
Separately, existing home sales, which are captured at the contract closing and reflect activity from about two months ago, fell 2.4% in March to 4.4 million. Sales are 22% lower than a year ago. Short supply is partly to blame, as inventory levels remain tight, with only a 2.6 months’ supply in March. About six months’ supply is needed to better balance supply and demand and alleviate bidding wars. Listings are still about half of what they were in 2019. Sales fell in all regions except the Northeast, the smallest housing market.
Activity over what is usually the busiest home buying and selling season will remain muted.
Mortgage applications to purchase a home are about 36% lower than they were a year ago for the first half of April. The average purchase loan size is now well above $400,000, 60% higher than the average of the 2010s. FHA loans for purchase, which are used by first-time and low-income buyers, are 26% below year-ago levels. Adding insult to injury, mortgage credit availability is the tightest it’s been since 2013.
The 30-year fixed mortgage rate had been ticking up in early March, which suppressed activity in a very interest rate sensitive market. Rates are still below 7% but are nowhere near the 5.5% most future buyers said they need to enter the market. Additionally, most homeowners are either locked into a mortgage rate below 4% or have paid off their mortgage entirely. They either will not or cannot afford to list their homes and lose the hedge they currently have against escalating rates and prices. That is one of many reasons that the market remains undersupplied and marks a sharp contrast to what we are seeing in most other developed economies, where mortgage rates are adjustable not fixed. This is why some countries have recently paused rate hikes, while the Federal Reserve looks all but committed to at least one last hike in rates in May.
Bottom line
Home builders are picking up a portion of the slack left by an unwillingness to list in the existing market. That has not alleviated affordability hurdles or access for first-time buyers. With mortgage rates expected to remain high through the end of the year and mortgage credit availability continuing to tighten, activity over what is usually the busiest home buying and selling season will remain muted considering how much demand is out there.
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