Higher rates and prices hit new home sales

November 26, 2024

New home sales, which are recorded when contracts are signed, plunged 17.3% in October as hurricane devastation made its mark. Hurricanes Helene and Milton hit Florida, Georgia, North and South Carolina, Tennessee and Virginia in late September and early October. New home sales in the South, the largest housing market, cratered 27.7% to the lowest level since pandemic-era lockdowns in April 2020. A rapid rise in mortgage rates at the end of September adds insult to injury.

The median sales price jumped to $437,300 even though there was more inventory on the market. The number of new homes available for sale shot up to a 9.5 months supply at the current sales pace, the highest since October 2022. Larger builders have been seeing more success with the use of mortgage rate buydowns and other discounts to bring in sidelined buyers; their inventory levels are much lower. Smaller builders have a tougher time gaining market share. Consolidations in the industry are expected.

An uptick in sales is likely as communities recover from hurricanes. The slow recovery following previous hurricanes suggests that some communities may not rebuild, prompting residents to relocate. The extent of rebuilding will largely depend on the support provided by governments and insurance companies. Additionally, the demand for workers in the most severely affected areas will strain resources elsewhere, especially given the ongoing labor shortages in construction. Supply chain bottlenecks due to infrastructure devastation, like washed-out roads, make rebuilding more challenging.

Separately, existing home sales, which are recorded at the contract closing, rose 3.4% in October. Those sales contracts were signed a few months earlier, before mortgage rates started to rise. Sales rose 2.9% compared to a year ago, the first annual increase in over three years. Hurricane devastation and higher mortgage rates are expected to weigh on incoming data for December and January.

Inventory available for sale rose to a 4.2 months supply at the current sales pace for existing homes. That is higher than a year ago but not yet enough to meet the pent-up demand from first-time buyers. The share of first-time buyers has fallen to 24%, the lowest on record. The median age of the first-time buyer is 38, the highest on record. This is not an easy housing market for a first-time buyer, as affordability challenges from down payment size, high mortgage costs and increasing insurance and tax costs all pose hurdles. Those who already own are watching their equity grow, creating a larger wealth gap between owners and renters.

Mortgage rates have been steadily rising since late September, the opposite direction of short-term rates. As the 30-year fixed mortgage rate hovers just below 7% in late November, builders will need to keep offering incentives to tap pent-up demand. Affordability challenges in today’s housing market are not just about mortgage rates, but they matter when calculating a monthly payment. Buyers who locked in ultralow rates in the 2020-2021 years or have been able to buy with all cash are on better footing.