New home sales spiked in July

August 23, 2024

New home sales surged 10.6% in July to the highest level since May 2023. Sales are captured at the contract signing and reflect more recent activity in the market than existing home sales do. Mortgage rates have been moving lower since early July and settled around 6.5% by mid-August. This has unleashed more refinancing than new purchase activity as would-be buyers are holding out for even lower rates. Higher-end buyers led the jump in new sales during the month, as the $500-$600,000 price range recorded the largest move-up in sales.

The jump in sales was broad-based as all regions had stronger sales both on a monthly and annual basis. Inventory of newly built homes ticked down in July, now sitting at seven and a half months of supply at the current sales pace. Inventory was averaging above eight months’ supply for most of the past year. This is good news for builders as they complete more single-family housing projects. Builders expect even more demand to be unleashed once mortgage rates fall further. They are holding off on starting new projects, as seen in the slump in single-family building permits in July.

Separately, existing homes sales rose 1.3% for the first time in five months in July to a pace of 3.95 million. Sales remained lower than a year ago. Sales are captured at the contract closing and are a more lagged indicator of housing market health. Mortgage rates were closer to 7% two months ago.

Resale inventory ticked up 0.8% in July and now sits at a four months’ supply. At the tightest point of the recent housing cycle, inventory was only 1.6 months’ supply. Still-low inventory has kept prices rising, with the median sales price for a resale home moving up to $422,600 in July. For comparison, the median sales price of a newly built home was $429,800. Newly built homes tend to sell at a premium to the resale market, but that gap has narrowed in recent years due to the supply shortages.

Affordability remains a challenge, as high prices and high mortgage rates are met with surging insurance costs. Home insurance tends to be required by mortgage lenders; only 27% of homes sold in July had an all-cash offer. Extreme weather events are picking up as more homeowners find themselves living in high-risk areas; some places are no longer insurable. Rising property taxes add insult to injury as most potential buyers are unable to afford a home; affordability has been averaging at the lowest levels since the 1980s.

Although the recent decline in mortgage rates has boosted some refinancing activity, around 76% of mortgaged homes have a below-5% mortgage rate; the current rate environment is not appealing for refinancing yet. Instead, many homeowners have tapped into their near-record high home equity using home equity lines of credit (HELOCs). A first quarter 2024 report by the Federal Reserve Bank of New York found that homeowners aged 50+ made up 57% of HELOC originations since 2023. About half of HELOCs originated had a limit of $100,000 or lower. This provides a cushion for spending in a still-high interest rate environment and gives older homeowners more spending power.